Trading binary options and forex CFDs trading should take into consideration both fundamental and technical analysis. If markets are generally being moved every time an economic release is hitting the wires, meaning fundamental reasons to be the cause for price movement, this doesn’t mean that we should not look into technical analysis as well.
Forecasting Future Price Movements with Fibonacci
One of the most important technical analysis tool available to traders is the Fibonacci Retracement and it is widely used when forecasting future price movements. Like the two recordings that are coming with this educational series shows, Fibonacci Retracement is used in different situations, like:
- when identifying the retracement level for a specific wave under the Elliott theory. For example, it is well known the fact that there is a strong tendency for price to retrace for the second wave within the 50%-61.8% level when compared with the previous wave. How to find such a retracement level? Well, the recording below shows where to find the Fibonacci retracement tool and how to use it in measuring a wave. In this situation, if the previous trend is bullish, then 50%-61.8% is the are to buy call options. If a reversal pattern is to be found on that area too, like a head and shoulders or a wedge, then this is just coming to confirm the retracement level.
- when looking at a potential corrective wave, like a zigzag or a flat, the key stays with the b wave and the retracement level this one has. If the b wave retraces less than 61.8%, then the corrective wave is a zigzag. If the b wave retraces more than 61.8%, then the corrective wave is a flat.
- when trading contracting triangles as there is a strong tendency for legs of a contracting triangle to retrace more than 70% when compared with the previous leg, so if there is a nice area to buy call/put options, then measuring the previous leg of a contracting triangle with the Fibonacci Retracement tool should give the entry for buying the options, and then, depending on the time frame the triangle is identified, the proper expiration date should be found.
All in all, it should be considered that the Fibonacci levels are extremely important in technical analysis so a proper understanding of such levels is a must for any trader, regardless the market it is traded.
Fibonacci tools are highly regarded by traders as Fibonacci sequence can be found in any areas, not only in trading. In trading it is even more important.
Not only Fibonacci retracement is being used, but also Fibonacci time zones, a tool where one can take the time element into consideration, Fibonacci expansion tool and Fibonacci arcs as well. However, there is no other trading theory that uses the Fibonacci ratio like the Elliott Waves Theory as basically they go hand in hand. Elliott Theory would not even exist if there were not the Fibonacci numbers.
Fibonacci Retracement – Golden Ratio
Like mentioned at the start of this article, the golden ratio, or the 61.8% retracement level is key for trading with Elliott as so many things depend on it that it is virtually impossible to list them all here.
Just to give you some examples, the golden ratio is a MUST to be retraced after say a double zigzag is completed. How to know that the pattern you are looking at is a double zigzag? Well, looking at the move and seeing if it is a move that channels really well. If that is happening, then it is a double zigzag. That being said, a put options can be traded after a double zigzag to the upside concludes or a call options after a double zigzag to the downside ends.
What About the Strike Price?
The thing to do is to wait for the channel to be broken to the downside (if it is a rising channel) or to the upside (if it is a falling channel) and then trade the option, a put option in the first case and a call option in the second one.
Of course that the expiration date is key here as it should be calibrated depending on the time frame the channel appears. For example, it would not be recommended that the expiration date is a short one if the channeling situation is happening on the daily chart or even higher time frames. This is just an example for Elliott Waves integration and Fibonacci retracement tool but it is not the only one.
Elliott Waves Principle is considered to be a relative one and there are some patterns that are being followed by a retracement but the actual retracement levels are represented by an area. For example, a double combination that is irreversible should be retraced between 61.8%-80% and in order to find out that area Fibonacci retracement tool comes just in handy.
Find out more about this wonderful trading tool by watching the two video recordings we added to the article.