There is no secret that markets are moving in waves, or cycles, and not in a straight line. Therefore, even if one is bullish for example, it may decide to add to a long position, or, in the case of binary options, would not want to trade only one option as it is not a wise decision to do that.
Splitting the amount into different entries and then looking for possible places to trade is the normal thing to do and this is the purpose of this educational series, to identify retracement levels to add to a position. Retracement levels are to be found by using the Fibonacci levels and the most important ones are 61.8%, 50% and 38.2%.
Discover the End of a Wave by Splitting
These are usual places where a corrective wave should end and by splitting your entry into different amounts and buying call options in a rising trend at the 38.2%, 50% and 61.8% would give a trader better chances for the options to expire in the money than otherwise.
When it comes to Fibonacci numbers, there is no other place to look for those numbers in trading or technical analysis but together with the Elliott Waves Theory. Elliott Waves without the Fibonacci numbers is basically useless as all the patterns, especially the corrective ones but not only those, are related to the Fibonacci retracement levels.
Find a Five Waves Structure
In a zigzag, there is no way any part of wave b ( a zigzag is always labeled with letters, a-b-c and it is a corrective wave – make sure you check the part dedicated to zigzags in our Forex Academy) is allowed to retrace more than 61.8% out of the first move, namely wave a. That being the case, and knowing that in a zigzag wave a is a five waves structure, or an impulsive move, all we have to do is to find a five waves structure for the wave.
The next step is to take a Fibonacci retracement tool and measure the whole length of wave a, from the beginning of the move all the way to the end of it. Because no part of wave b to follow should retrace more than 61.8%, we can scale into a position. Scaling means finding the perfect open trade price in a specific move by investing/trading smaller amounts than the original intended and this is applying to binary options as well.
Moreover, binary options offer even a bigger advantage as one can not only play with the levels or the striking price but also with the expiration date. To continue the example above, the thing to do is to split the desired amount to be invested into three different parts. For example, if the plan is to trade a 100$ call option in a possible bullish zigzag pattern, then the idea is to scale into the perfect position by splitting both the invested amount into smaller ones and playing with the expiration dates as well.
Buy Call Options on 23.6% Fibonacci Retracement
What it is recommended is to buy a call option on a dip to the first important Fibonacci level, the 23.6% retracement and this option should have the biggest expiration date of them all as it is possible for price to still dip lower as only the 61.8% level would invalidate the pattern.
This option should have one-third of the original investment, and in our example this means we should look to trade a call option worth of 33$ and the expiration date, let’s say the time frame is the hourly chart, should be anywhere from end of day to end of week expiration. Don’t be afraid to trade end of week expirations or be greedy as planning and executing are two things that go hand in hand and their purpose is to keep a trader safe to trade another day.
Enter with a Call Option on 38.2 Retracement
The next level is to trade a call option at the 38.2% retracement level as that is the MOST likely level the market is going to retrace in a zigzag and here we can afford a lower expiration date and a bigger investment, normally I would go with half of the original size, or 50$. End of day expiration date or end of week if the option is traded in the second half of the week, after Wednesday let’s say, should do the trick if the time frame the zigzag is forming is hourly or four hours chart.
The rest of the initial amount, namely the 20$ left out of the 100$ investment should be traded anywhere between 50% retracement and 61.8% as that is the absolute invalidation of the pattern. And just like that, we scaled into a position with the original amount we wanted to invest and with the expiration date being different as well we’ve diversified our portfolio without bearish risks that were not supposed to be there after all.