Three Fibonacci Rules For Binary Options Traders

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When it comes to trading binary options, it is widely suggested to take into consideration both technical and fundamental forms of analysis. Fundamental analysis often deals with the reasons as to why a particular market is moving when it hits a certain indicator line and technical analysis then uses other methods to further predict trend reversals. Fibonacci retracement is an analysis technique which makes good use of both fundamental and technical data.

Fibonacci retracement is an investment analysis strategy that is available to traders that is widely used when forecasting future price movements. It is a bit more complicated than some of the other binary option investment strategy tools, but it can be an extremely accurate predictor when used and analyzed properly.

Fibonacci retracement is a technical analysis term that tries to identify a future area of support (one where price stops going lower or higher) after an original price movement starts taking place. It does this by looking at historical data along similar time frames to look for similar patterns in the past when this takes place and comparing them to what patterns are taking shape presently.

Fibonacci retracement is charted by using two horizontal lines that help to identify areas of resistance or support before a market then resumes trending in the original direction. It establishes a trend line that is drawn by connecting two extreme points and then uses preset ratios (such as 100% – 61.8% – 50% – 38.2% – 23.6%) to divide the vertical distance of these extreme points. The 61.8% ratio has long been referred to as the golden ratio or golden mean.

It is not easy to simply explain why these number ratios work, but they have been proven to do just that over time. Fibonacci first used these ratios to prove their importance in nature in mathematical models, but they have proven to be strong indicators of where strategic trades should be placed too. This makes Fibonacci retracement the least understood analysis and the most intimidating strategy for new traders.

Make no mistake about it though, retracements can be a key component in identifying an uptrend and can pick them out whether they are strong uptrends or not. Given this, it is extremely practical to build a trading strategy based on them.

What makes a retracement a vital component of market analysis? The answer is easy, the traditional inherent nature of markets and trading suggests that a trader that got on board early on a particular asset will look to get out with some profit before the trend reverses itself causing losses; this in turn creates the inevitable trend reversal. This type of reversal trend is usually jump started by the conservative nature of institutional traders.

This also tends to make Fibonacci retracement and its trend dependence prone to be best used on daily charts as opposed to much more market noise sensitive shorter time frames. So be sure to avoid using shorter time frame charts when analyzing using the Fibonacci retracement method.

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Fibonacci levels

Fibonacci levels are one of the most popular Forex tools. The history of creation, the rules of construction and the application of Fibo levels in trade.

One of the important tools Technical Analysis are technical levels. This is a certain value of the price, which, when approaching the course, will be an obstacle to further advancement. Graphically, it looks like an area where the price approached and rolled back, then approached again and again could not overcome the resistance. There can be several such returns, and the more of them, the stronger the level.

Distinguish support and resistance levels. Support is at the bottom of the price range, it does not allow the rate to fall further down, and resistance prevents the price from moving up. There are always support and resistance levels for the current value. The main rule is that the price will push off from the level rather than break through the level.

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Experienced traders emphasize that breakdown level also possible: it usually occurs at some strong impulse, for example, the release of important news, and then the price flies out for the level by a large number of points. Breakdown techniques are based on this, but they are considered quite aggressive.

Fibonacci retracement levels during the movement, prices also provide resistance or support, but this is already partly a computer indicator. Its layout contains a certain dependence, which was deduced long before the appearance of Forex trading.

The history of the creation of Fibonacci levels

Leonardo Fibonacci (12-13 centuries) – Italian mathematician who discovered a number of natural numbers that are in a certain relationship with each other.

The Meaning of Fibonacci Dependence – each subsequent number is equal to the sum of the previous two. The series starts from scratch, and it can be continued indefinitely: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 .

It is interesting that the Fibonacci dependence was used in the famous book “Da Vinci Code”, where the main characters guessed a cipher based precisely on this number series. And Fibonacci himself initially developed his dependence to find the formula for breeding rabbits.

Fibo numbers are also related to each other by the “golden ratio”. it coefficient 0,618. Starting with 4 members, each previous number is 0,618 times smaller than the next. If any member of the Fibo series is not divided by the next number, but by a number through one, then we obtain a ratio close to 0,382. And if we take the third member of the series after the original, then the ratio between them will be approximately 0,236.

The mathematician did not discover this proportion, he only reminded it of humanity, because these dependencies were known and used by the ancient Greeks in the construction of the Parthenon, the Egyptians for their famous pyramids. If we look at the world around us, we will find many wonderful examples of proportionality and harmony. The most striking demonstration of golden numbers is the number of petals in some colors:

  • Iris: 3 petals;
  • Primula: 5 petals;
  • Leafwort Ambrosia: 13 petals;
  • Ordinary ordinary: 34 petals;
  • Astra: 55 and 89 petals.

It is the proximity of the Fibonacci series to the “golden section” that led to the creation on its basis of a set of tools for analyzing and predicting market dynamics: fan lines, arcs, correction levels and Fibonacci time periods.

There are only seven correction levels. Between them, too, there is a “golden proportion”. If we multiply the level of 61,8 by 0,618, we get the level of 38,2. In total, they give 100%. The levels of 23,6 and 76,4 also total 100%.

Key levels – 38,2%, 50%, 61,8%, they will provide the greatest resistance and support with changes in the course.

These levels are used and to predict correction. If the correction begins, then the rollback may be a third of the trend, it may be half, and the maximum size – up to 61,8%. If the price rolls back by more than 60% – this is not just a correction, but a reversal of movement in the other direction.

Building Fibonacci Levels

There are several rules for building Fibo correction levels. The levels are laid out between two key points, and the previous trend is used, because the movement now is a correction to what was before. That is, if the course is now going up, then we will lay out Fibo according to the previous downward movement and vice versa. We always work from the past to the future.

If the price goes beyond the levels of 0% and 100%, then for the Fibonacci levels, you need to look for other key points. If we do not find in this timeframe, then you can search in a larger one, for example, for hourly trends, expand the levels in a timeframe of 4 hours or a day. If we work with movements that occur in days, then Fibo can be placed in weeks or months, i.e. in periods that in any way cover the movement we need.

To decompose Fibo line, click on the desired button on the toolbar, find the first point, left-click and, without releasing it, drag Fibo to the second control point. The line itself is automatically displayed at the same time on the chart.

Using Fibonacci levels in trading

When the course moves, no clear trend may form, there may be no technical figures, but there are always levels. And the trader should always expose them in order to know where he needs to take profits.

Fibo correction levels in this sense are very convenient to use. Firstly, they show the areas of resistance and support, and secondly, the possible correction size. At the same time, all level rules apply to them.

If you see that the price is approaching the level, then high probability of a reversal, since the price is easier to roll back than trying to overcome some kind of obstacle. Accordingly, you can plan the next deal after a bounce from the level. At the same time, the larger the timeframe this line is built in, the stronger the levels will provide resistance.

But the most important rule when working with Fibo levels is work towards breakdown. If the level of 38,2% is broken, and the rate collapses below, then, of course, we will sell. And then the target will be already near 50%, in the value of 1,5210.
It is necessary to take into account the situation of “false” breakdown, i.e. when the price seems to fall below the level, but then there is a return, and there is no penetration as such. Breakdown a situation is considered when a new candle has fully opened and closed behind a key level. If only the spike went beyond the level, then here we do not work for a breakdown. Therefore, we open deals if the price falls below the previous spikes.

Another general rule for working with levels. Exposing Take Profit, calculate this value not purely mathematically, but also look at the price chart. Your Take Profit should stand up to the level where there was still a price (where the spikes reached). A Stop Loss, on the contrary, they hide behind the levels (on the breakdown of which they work), where there are no thorns, so that your Stop Loss will not be hooked by a random rollback.

When trading, a trader must necessarily consider resistance levels and support, a very convenient tool for this is Fibonacci ruler. Moreover, it allows you to simultaneously see the possible size of the correction.

When the price approaches the level, then two options are possible – to work on the breakdown of the level and on the rebound, but whether it will be a deal to buy or to sell, you already need to look at a specific situation.

Once again we repeat: take Profit we set it to the level, Stop Loss, on the contrary, we hide it for support or resistance, so that they are not “licked” by a random rollback.

Be sure to consider these points in the trade – and then you will be lucky!

Fibonacci Retracement Binary Options Strategy – How It Works

Fibonacci Retracement is an innovative technical strategy based on the Fibonacci tool, developed to detect more stable retracements. Compared to the original Fibonacci usage, the new system is considered much more effective. This article will show you in detail how to apply this strategy to collect binary options trading opportunities.

What is Fibonacci Retracement?

As you already know, the Fibonacci trading tool is highly appreciated by many traders due to its accuracy in spotting bounces/reversals. It’s mostly applied to determine hard support and resistance barriers. Therefore, in that logic, let’s say you draw two Fibonacci retracements and see some overlapping levels, surely they are ‘stronger’ and likely to halt prices better than the separate thresholds, correct?

The good news is, both Fibonacci Retracement and Extension can be used in this way, and this technique could be applied to any financial assets, from currency pairs, commodities, indices to cryptocurrencies. However, in order to make this strategy work, you must know how to combine the Fibs correctly. Let’s review some practical trading examples to find out how to use this Forex Fibonacci strategy precisely.

How to use Fibonacci Trading Strategy?

Remember – the larger the trading time frame is, the more accurate the signals are.

Let’s say you are watching an uptrend. In a bid to identify the obstacles that prices may bounce at, you draw a Fibonacci retracement. The first point is the lowest point of the trend, while the final point is the highest swing high.

After having the first Fibonacci retracement, your work is to create a smaller one to seek the overlapping levels. The smaller Fib’s first point will be the nearest swing low (must be easy to look), while the final point is at the same place with the large Fib’s ending point.

As you can see, the 23.6% level of the large Fib is very close to the 50.0% threshold of the smaller one. That support area is highly reliable and sufficiently strong to force prices to retrace.

On the contrary, you can create a large Fib in a bearish trend by drawing from the highest point to the lowest swing low of the trend. The smaller Fib is made in the same manner as in an uptrend: drawn from the nearest swing high to the lowest swing low. Of course, the swing high must also be obvious.

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The Fibonacci Fans binary options trading strategy discussed here aims to spot opportunities to initiate Call or Put trades using and indicator that draws specialized lines that spread out like a fan when applied on a chart. These lines are not drawn randomly by the indicator, but are drawn based on specific calculated areas known as the Fibonacci numbers. To understand the strategy, we need to understand the indicator for this strategy.

Fibonacci Fans are also called Fibonacci Projections. The tool in question is found under the Fibonacci group of indicators. These are indicators that identify potential price retracement or reversal areas based on the Fibonacci numbers. These numbers are located at retracement levels that are at 23.6%, 38.2%, 50%, 61.8%. 78.6% and 100%.

The Fibonacci Fan Tool

The Fibonacci Fan tool is used to catch retracement entry points within the contect of a trend. The fan lines resemble a hand-held fan which has been spread out, hence the name. The fan lines may either point upwards or downwards and the direction of the fan lines is a reflection of trend.

Chart Setup
In order to trade this strategy, the chart setup should be performed as follows:

  • MetaTrader 4 Indicators: The MT4 tools used for this trade are the Fibonacci Fans tool and the Stochastics oscillator, set to 10,3,3.
  • The time frame chart used in setting up this trade must be at least 4 hours. This is because long term charts are a better reflection of the trend than short term charts which are mostly market noise.

Indicator Settings
To activate the Fibonacci fan tool and use it to perform the chart trace, click on the Insert tab on the top navigation menu. Then select Fibonacci, and then the Fans tool. You can modify the properties of the indicator as you wish, while retaining the original Fibonacci fan line settings.

STRATEGY
The strategy is to locate a retracement from a major trend, and then to seek out areas where price action will continue in the direction of the original trend. The Fibonacci fan lines mark out the areas where the price retracements will come to an end.

Since there are 5 of such areas, how does the trader determine the exact one where this will happen? Another tool is introduced and this is the Stochastics oscillator. This indicator can detect overbought and oversold market conditions. When the lines of the Stochastics indicator cross at overbought or oversold levels when price is at a Fibonacci fan line, this is the definition of the area where retracement will end for continued price movement to occur. The trader can then decide to enter a Call option (oversold) or a Put option (overbought).

Rules for Choosing a Call Option

A Call option trade aims to capture the renewed upside move following a retracement of price action from an uptrend. Therefore, a trade entry for a Call option should be made when the following setup occurs:

a) Trace the Fibonacci fan tool from a swing low point (lowest price point on the chart) to a swing high (highest price point) on the chart. This traces the fan lines on the chart.

b) From an initial uptrend, the price retraces to a Fibonacci fan line. The price action candle in question must touch a fan line without the candle closing below that fan line.

c) The Stochastics oscillator lines cross at levels at nd candle.

For this chart, the time frame is 4 hours, therefore the trade exit should be set to 8 hours.

Rules for Choosing a Put Option

A Put option trade aims to capture the renewed downside move following a retracement of price action from a downtrend. Therefore, a trade entry for a Put option should be made when the following setup occurs:

  1. Trace the Fibonacci fan tool from a swing high (highest price point on the chart) to a swing low (lowest price point) on the chart. This traces the fan lines on the chart.
  2. From an initial downtrend, the price retraces upwards to a Fibonacci fan line. The price action candle in question must touch a fan line without the candle closing above that fan line.
  3. The Stochastics oscillator lines cross at levels at >75, which is classified as overbought when price is at a fan line.
  4. At the fan line in question, wait for the next candle to open and attempt to pull back up to the fan line in question. Once it touches the fan line, go to your binary options platform and purchase a PUT option.

The setup for the Put option is displayed on the chart below.

In this example, we can see that the retracement from the downtrend was to the 78.6% line, and since this was where the Stochastics was overbought, the Put trade is valid at this point.

Trade Expiry

For the daily chart, the trader has the option of selecting one or two candle lengths in determining the trade expiry. This is equivalent to an End-of-Day expiry.

Disclaimer: “Your capital may be at risk. This material is not investment advice.”

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