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. Here you can easily see the high and low points the option has reached in any given amount of time.
Fibonacci Retracements use the high and low points of each option to trace horizontal lines over top of the chart. 100% and 0% lines are traced at the high and the low points, respectively. Three additional lines are added in between at 61.8%, 50% and 38.2%. These percentages have been determined mathematically and are the same for all Fibonacci Retracements.
It has been historically shown that as the price of a stock or option moves, the support and resistance points are typically at or very close to these lines, therefore allowing investors to better understand how an investment is likely to react to changes in the market.
How Can Fibonacci Retracement Help With Binary Option Trading?
Since the percentage lines drawn on the chart help predict where changes will occur, it can help you to predict when is the right time to purchase or sell your binary option. For example, in a downward trend option after the low point, according to Fibonacci Retracement, we expect that the option will have an upswing but only as far as one of the Fibonacci percentages. Thus, purchasing this option with the prediction that the price will drop before it reaches either the 38.2 or 50th percentile tends to be in line with past trends in the market.
Alternatively, a prediction that the option would rise above the 61.8th percentile would go against the Fibonacci Retracement and therefore be less likely to occur, resulting in a potential loss.
Is Using Fibonacci Retracement for Binary Options Foolproof?
In short, no. Although Fibonacci Retracement is a good indicator of past trends that can be utilized to predict future trends, there are many factors that make it inconsistent. For example, a novice trader will tend to use Fibonacci Retracements directly as they are plotted on their chart. This is in contrast with an experienced trader who knows to adjust the percentiles to better fit the layout of the specific asset’s chart, thus giving a better prediction of when the retracements will occur.
As you become more experienced using Fibonacci Retracements with binary options, you will begin to gain an understanding of whether the Fibonacci lines are correct or need adjustment. Secondly, since the market itself is volatile, it is impossible to predict with 100% certainty that an event will happen at a certain point in time, thus it is important to be prepared for a certain degree of risk when dealing with binary options.
What Type of Binary Options Can Fibonacci Retracements Help With?
Since Fibonacci Retracements simply overview trends that are likely to occur in the market, they can be used with any type of binary options. As with any investment, before you use Fibonacci Retracements with more complicated binary options such as double touch options, consider using a demo account to trial what you have learned.
With tried and tested mathematical tools such as the Fibonacci Retracement at your disposal, you can make educated decisions on how and when to trade binary options. Take the time to fully understand the process and talk to those with experience to gain a better understanding of different investors’ strategies for utilizing them. Before you know it, you will be trading with the best.