One of the most important trading tools one trading platform can offer are for sure the Fibonacci tools, the retracement, expansion, but also the time zones and arcs. Knowing what they are useful for and what to do with them offers the binary options trader a competitive advantage in finding the perfect striking price and expiration date needed for the option to expire in the money. For CFDs traders they are indenspensable in trying to predict the future movement of the underlying assets.
Regardless of the trading platform involved, this is the tool that takes into consideration the retracement for specific waves (Fibonacci Retracement), the extension for impulsive moves (Fibonacci Extension) or even the time element (Fibonacci time zone). In our situation here with the Forex Academy program we are looking at the Fibonacci Extension Tool and how can a trader use it and, more importantly, how to actually trade based on it or with it.
How to Use Fibonacci Extension Tool
Trading implies taking the time element into consideration and, depending on the time frame traded, the expansion tool provided by Fibonacci is of real help. Our examples there deal with one of the most common pattern of them all in trading markets: the impulsive move using Elliott Waves theory. The thing is that in an impulsive move at least one wave needs to be extended and this wave it is usually the third one. That means the trader, after identifying a possible first wave, should take the Fibonacci expansion tool and look for the 161.8% extension when compared with the previous wave. Clicking on the beginning on the first wave a, the end of it and the end of the possible second wave gives us the setup for the extension tool and the outcome should be expected at the 161.8% level. If this is not coming, then the move is not impulsive and the whole count prior to that point should be reconsidered.
Predictions Based on Fibonacci Numbers
This tool is only of the many that any trading platform is offering as Fibonacci is being used in pretty much everything that is related to technical analysis theories. There is simply not possible to make a prediction based on patterns if one is not considering the Fibonacci numbers. The Expansion tool is used to find out the extended waves in impulsive move, but also in finding out, let’s say, the end of the b waves in running triangles.
In any impulsive move there is mandatory for price to go and extend one wave and this means that one wave should go and stand out of the crowd, it should be the longest one. The extension has some minimum boundaries, and in order to find the exact place we need to use the Fibonacci expansion. In other words, let’s say we have a move to the upside and market is accelerating but according to our analysis it should reverse at some point. The way to find out the potential level is to look at the length of the first move higher and then measure the 161.8% extension out of it.
Looking for Extended Waves
Applying the extension from the end of the second wave would offer the trade an educated guess regarding the end of the third wave and a put option can be traded with the expiration date being related with the time frame the impulsive move was appearing on. It is advisable that one should look for extended waves or move before important economic events as market needs a reason for a specific move and the reason is coming out of the economic agenda. Therefore, releases like jobs data, GDP (Gross Domestic Product), retails sales, unemployment rate, etc, may prove decisive for a central bank to change the monetary policy stance and that is the moment markets are travelling.
Fibonacci Expansion Tool and Corrective Waves
The expansion tool can be used in corrective waves as well as the b wave in a flat for example can be a strong one, and this means it should break the highs/lows of the previous wave a, depending if wave a is bearish or bullish. In this case, a move for the b wave above the 161.8% level signals a c wave to come that should not break the lows/highs in the previous wave a and therefore trading call options by the time price comes into the territory of wave a is indicated.
The Fibonacci Expansion tool is a simple one to use in the sense that one should only select it from the Menu (in the case the analysis is made on Metatrader then one should go on Insert/Fibonacci/Expansion) and then click and drag it on the screen. It should be noted that if you’re looking for a running correction, namely when the bearish correction ends above the end of the previous bullish move, then the expansion tool on the Metatrader cannot be used. Other trading platforms though, like the JForex for example, are not having this issue.