Finding the Right Trade Price
Finding the right striking price is key in successfully trading. It requires a lot of patience and this is something traders lack.
Combining fundamental analysis with technical analysis is key – moving towards successful trading and technical analysis without Fibonacci levels is simply impossible. The most important Fibo level is the 61.8% but we should not go trade just like that when price meets this level as it is not that simple.
What one should look for is to take into account the pattern that is forming and then associate the corresponding Fibo levels. For example, trading a contracting triangle requires a lot of retracement for the leg of the triangle and therefore looking for more than 61.8% is appropriate. Moreover, if you trade a flat pattern or a zigzag, then the key for both patterns comes from the 61.8% level, in the sense that it is mandatory in the case of a flat, and should be avoided in the case of a zigzag.
Using the Elliott Waves Theory
Finally, an impulsive move according to the Elliott Waves theory should be expected after a retracement in the 50%-61.8% retracement level.
Fibonacci works hand in hand with Elliott Waves Theory when it comes to trading and I would say that one without the other is not possible. Actually, the whole Elliott theory is based on Fibonacci numbers and using those levels results in finding perfect striking prices for your binary option or entry prices for your forex CFDs.
To start, any impulsive move should have one extended wave and the extension is considered to be any wave that is bigger than 161.8% level. While that is the minimum level for a wave to be considered extended, it is not wise to stay and insist in that direction by the time the 161.8% is reached, so trading an option in the opposite direction is the way to go.
Fibonacci with Corrective Waves
In corrective waves, it all comes to the 61.8% Fibonacci level to find out what kind of a correction market is forming and then looking at the type of the correction. For example, if market is forming a flat pattern, knowing what kind of a flat is based on the Fibonacci retracement of the b wave when compared with the previous wave a is vital. In this regard, levels like 80%, 123.6% and even 138.2% are places that give a nice opportunity to trade in the opposite direction looking for the c wave, a new impulsive move, to form.
There is a strong tendency between traders to look for the third wave to be the biggest one in any five wave structure pattern. While this is true most of the times, it is not always. However, traders are looking for the second wave to retrace between 50% and 61.8% and in that area striking prices for call options have most chances to be the ones of profitable options if the impulsive move is a bullish one.
Even if market will turn out not to form the second wave down there, there is still the possibility that the move that goes more than 61.8% retracement into the territory of the first wave to be only wave a that is part of the second wave. This is still good enough when it comes to a call option if the impulsive move is a bullish one as the b wave should retrace a lot out of wave a, so the move will still be to the upside.
Another way to use Fibonacci levels to find the right striking price is to use the Gartley trading method. This method is highly dependent on the 80% retracement level when it comes to a four waves move (A-B-C-D) and by the time the level is reached, an option in the opposite direction can be traded. This Gartley method is a bit risky one as it fails pretty often but when it comes to binary options and when you consider the rate of return on investment then it is worth considering as a potential trading tool.
Coming back to the Elliott Waves and trying to interpret the Fibonacci levels, the extensions on any move are not only related to 161.8%. Like mentioned earlier, that is the minimum level, but 261.8% or even 461.8% extensions are common. The more the impulsive move is travelling, the more aggressive the option to be traded should be.
The most common consolidation areas form triangles and a leg of a triangle is almost always breaking the 50% retracement when compared with the previous leg of the same triangle. That being said, trading call options in a bearish move with expiration dates bigger than the time frame the triangle is forming is the way to go for success..
Find out more details regarding these setups by watching the two video recordings we added to the article.