The Fibonacci retracement tool is regarded by some as a lesser used technical trading tool. It is used to analyze market moves because markets have a tendency to retrace their previous movements. These retracements are normal trading activity. The trader should understand retracements and use them to their advantage. One tool to use is the Fibonacci retracement tool which places five horizontal lines on charts. These correspond to 5 possible spots to where prices may retrace with the intervals calculated by percentage from the original move: 100%, 61.8%, 50%, 38.2%, 0%. Prices can revert to any of these levels. So how would you use this retracement concept with binary options?
First remember that “Fibonacci” levels are used to point out possible points of support or resistance. The Fibonacci level is determined by a basic sequence of numbers. The first digit in the sequence is 0, the second digit is 1, and each subsequent number is determined by adding the two previous numbers together, so that here is sequence in action:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377
While some posit that this sequence was first found by Indian mathematicians approximately in 450BC, the general consensus is that the sequence was popularized by Leonardo of Pisa, aka Fibonacci, who published his results in the 13th century.
While originally proposed for animal breeding, the Fibonacci numbers and their affiliated outcomes are extraordinary and very apparent. For example, plants have their buds aligned with the Fibonacci number’s pattern. In arts, music has been arranged by Fibonacci numbers, and the painter Debussy arranged a work in part by Fibonacci numbers. In the UK, a structure called the “Eden Project” in Cornwall, England has its construction built on Fibonacci numbers.
In addition to Fibonacci numbers, the Fibonacci phenomenon also has Fibonacci “ratios” which are the results from dividing certain numbers in the Fibonacci sequence with identified other numbers from the sequence. As an example, if you divide each number in the sequence by the number that follows it, your results are a number approximately of 62. The further you proceed down the sequence, you will discover that the calculated ratio number is a constant near 61.8 mark. Thus 61.8% is almost the ratio of each Fibonacci number to the next. As another example, if you divide each Fibonacci number by the one after the next number, the results are a ratio of approximately 38.2%. The major ratios that come from various divisions include: 23.6%, 38.2%, 61.8% and 76.4%. These ratios plus 50% (not a Fibonacci number) are thus applied to the markets.
So when viewing your charts, this is how the Fibonacci numbers may work, e.g. you may expect resistance when the market re-traces 38.2% of a previous down-move, or conversely, you may see support when the market retraces 61.8% of its last up-move. Strange as it may seem, the markets actually coalesce around these ratios, and they serve as general reference points with which the trader can expect some kind of support or resistance. The fact that markets seem to migrate to these points is in a way also self reinforcing because many traders also expect the ratios and “push” the markets to these ratios. So the ratios become self fulfilling.
Therefore let’s take a better closer look at Fibonacci retracements and the process of their actions in the market place – 23.6% – 38.2% – 50% – 61.8%- 76.4% Thus while trading binary options, keep in mind these ratios. Also seek an asset that has a tendency to trend like gold, EURJPY, GBPJPY or EURUSD. Then consider a time frame like daily price action visible through charts in which you should be able to view a retracement. As you consider trades, choose the “Touch” option in the Touch/No Touch trade and choose a target price between current prices and the 23.6% retracement point.
If you examine the daily chart for the EURUSD which is the most actively traded currency pair based on its volume in both Europe and the USA, the EURUSD trends well. Choosing the ratio 23.6%, you as the trader want to choose a strike price at a point along the course of the price retracement, between the market price and the 23.6% level. For this strategy to work, the trader has to certain that a retracement is actually occurring. One way to do so is to use the Fibonacci tool supplied by the trading platform of your broker. Usually you can point and drag onto the chart the target price for your “Touch” trade.
The Fibonacci tool is very helpful is very helpful in letting the trader calculate the range of price movement. However to really understand potential price direction, a trader needs to be able to utilize candlesticks and chart patterns. These signals tell the trader price direction, and with Fibonacci you then can calculate via the ratio the possible price targets. Happy Trading!