Retracements are some of the most prominent components of any uptrend, regardless of its strength and it therefore makes perfect sense to build a trading strategy around this phenomenon.
Fibonacci Retracements in Binary Options Using Fibonacci Retracements to Trade Binary Options Fibonacci Retracements have become a popular method among investors to help develop a strategy towards trading binary options. Although the name may sound complicated, Fibonacci Retracements can be easy to understand, granted you can remember a few important numbers. What is the Fibonacci Retracement Tool? In any stock, commodity or, in this case binary option, you can track its price via a price versus time chart.
Why are retracements such inevitable components of all financial markets though? Simple: the nature of the market says that those who jumped aboard a given asset early will look to stop and take some profits after a while, thus inducing a temporary reversal of the dominant trend.
This tool is one based on thousands of years of mathematical observations originating in ancient Indian mathematics. Although he did not invent the number Fibonacci did a lot to bring it into widespread knowledge in middle aged Europe.
Institutional traders are usually the ones to kick-start the profit taking, followed by the rest of the traders. Because this strategy is such a trend-dependent one, the time frame used for it calls for daily charts.
The reasoning behind it is simple: smaller trade binary options at fibonacci levels frame charts, like hourly ones, are rendered irrelevant because of all the noise occurring through the day. The goal is to identify the point where a retracement move ends, by using the Fibonacci retracement tool.
The asset-price will bounce back to the dominant trend at one of the Fibonacci levels, defined by the retracement tool, the only remaining question is: which of these levels are we talking about? Click to Enlarge The Fibonacci retracement tool identifies five critical retracement levels, at which a trend-reversal is likely.
These are situated at The Fibonacci retracement tool is put into application by first tracing a line linking the lowest price-point of the time frame with the highest one these are also known as the swing high and the swing low.
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Once this has been done, defining the area of interest on the chart, the five Fibonacci levels will appear on the chart as horizontal lines, at the above said percentage-points. Statistically, most retracements break the first two Fibonacci levels those at It is based on catching the resumption of the previously dominant trend.
The stochastic oscillator is needed to confirm the end of the retracement period. Once this step has been cleared, traders need to set the previous Fibonacci level as the strike price for the Touch trade.
If the retracement ends on the This is obviously at one of the Fibonacci levels, but one will need the help of the stochastic oscillator to determine exactly which one.
The stochastic oscillator will indicate a situation when an asset is oversold having retraced from an uptrend, at one of the Fibonacci levels. That level is where the retracement is likely to end.
The Call trade should be purchased on the Fibonacci level on which the stochastic oscillator crosses at an oversold level. On the chart used for illustration, this level is obviously the The expiry time on this trade should be almost as generous as on the above described Touch trade. In this case, everything works pretty much by analogy.
Where the lines of the stochastic oscillator cross an overbought situation on the Fibonacci retracement level, a Put trade should be purchased, since that point marks the end of the retracement and the resumption of the bearish trend. As with any binary options trading strategy, it is recommended that you put this one to the test—preferably several times—on a demo account, so you risk no real money on it.
Once you feel comfortable with it and you feel you can aim for actual results, throw this puppy into deep water and take it for a spin.
- Additional indicator, such as Stochastic, will give information about relative oversold and overbought zones.
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While the above presentation was one disregarding several complex, probability-linked aspects of the strategy for the sake of simplicity, the probabilities and the expected value involved all work—at least, theoretically—in favor of the trader.