Fibonacci Chart Lines Are the Tool of Choice for Evaluating Binary Options


Guest post by ForexTraders.com

Technical traders tend to have their favorite indicators for evaluating the odds in a particular setup and gauging the consensus psychology of their “brethren” at a moment in time, but many of our community have shunned this approach in favor of following “the Fibs” for their guidance.  Fibonacci ratios, those magic little numbers that occur naturally throughout Mother nature’s universe, have been found to have applicability in our trading markets from as far back as the early 1900’s when Elliott and Gann performed their groundbreaking research by applying physics to wave motions in our financial markets.

For those that have not studied these curious ratios, references to the “golden ratio”, or 1.618, go back some 2,400 years when the Greeks began to notice its appearance in geometry and nature.  Fast forward to the 13th century, and we find Fibonacci, an Italian mathematician, that attached his name to the sequence when he studied rabbits and their frequency of reproduction.  Artists picked up on the notion, and scientists found the repetitive nature of these numbers in everything from crystals to our DNA.

What are the values of these Fibonacci ratios?  In our trading markets, a strong price trend tends to retract, or “retrace”, a portion of its previous path.  The most prevalent levels for these “retracements” have been found to be 23.6%, 38.2%, 50.0%, 61.8%, and 100%.  When this charting tool is applied to a pricing movement, the remarkable fact is that these ratios hold true over any timeframe and provide high probability insights into where future support and resistance levels may prevail.  A chart appears below:

Knowing where these “Fib” lines may fall becomes exceedingly valuable if you are trading forex binary options.  These “digital” or “all-or-nothing” options are fast becoming the preferred method for attacking the foreign currency markets.  Much of the cumbersome necessities, like setting stop-loss orders or having the potential for margin calls, are all but eliminated.  With binary options, the variables of the “deal” are set when the option contract is executed.  You know the amount of your risk and potential payoff or loss.  The rest is left up to the market and your ability to predict correctly the direction of future market price movements over a specific time period.

How can you maneuver the odds in your favor with these options?  Your broker’s trading platform will present key “barriers” for each deal.  Depending on the type of option, whether one-touch, no-touch, or a double variety, your decision is to predict with a high degree of certainty if a specific “barrier” will be penetrated or not.  The “Fibs” are an excellent tool for this purpose.

As in the “USD/CAD” 5-minute chart above, the “Fib” tool was employed by dragging the cursor between the “blue” circle points – the ratio lines are then drawn automatically by the tool.  When the upward thrust of the trend lost steam, its fall was then highly predictable to find support and resistance as indicated by the “green” ovals.  If you shifted to a 15-minute chart, the results would have still been the same.  These ratios apply across timeframes.

Fibonacci ratios may be a great tool for evaluating the barrier levels in binary options, but, like any other indicator system, they are not perfect.  They do signal where traders are liable to act with high probability, but additional confirmation from other indicators will help guide your interpretation of price action and your ability to forecast correctly future directions in prices.  The “RSI” and “MACD” also suggested that a downward slope was highly probable after the reversal.

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