Fibonacci numbers are a string of numbers noticed first by Italian mathematician Fibonacci from 13th century. String consists of numbers: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55 and so on. Notice that every number is actually sum of previous two numbers, this is how this string is created. What does it have to do with trading binary options?
Fibonacci Numbers in Trading Binary Options
Fibonacci numbers are linked to Fibonacci retracement which is a normal occurrence on markets. More so on trending markets, like forex. Retracement means that one trend moves price, say, upwards to a certain level, and then price starts to fall, but in phases according to Fibonacci retracement. Retracement happens usually in five different Fibonacci ratios. Fibonacci ratios are results from dividing numbers in Fibonacci string of numbers. For example if you divide each number in the string by the number that follows it, results would be approximately 0,618, since ratios are usually in percentages we are talking about 61,8%. This is central and most important Fibonacci ratio for trading binary options. There are other Fibonacci ratios that are used in trading binary options. For example if we divide each Fibonacci number by the one after the next number in the string, the result is approximately 38,2%. Often used ratios are also: 23,6% and 76,4%. Above those number some traders use 50% although it is not a Fibonacci ratio. So altogether we have ratios: 23,6%, 38,2%, 50%, 61,8% and 76,4%. Those are five used ratios mentioned above. Fibonacci retracement in trading binary options is one of most popular trading indicators.
How To Use Fibonacci Retracement in Trading Binary Options?
Like we already said, trends have a habit of retracing themselves. But retracement occurs in an “organized” manner. If we had a strong uptrend it will retrace first on one of those five Fibonacci ratios and then later on other, lower ratio, and then on maybe one more lower ratio. Of course if we initially had a downtrend, trend would retrace to one ratio, and then to higher ratio and then on maybe one more, higher ratio. Make sure however when you use Fibonacci retracement in trading binary options that you pair it with some other indicators, such as fractals or bollinger bands to increase chances for succssessful trade.
Example: Trading EUR/USD pair
We see at our chart clear uptrend say, from 1.2345 to 1.2350. 100% level is on low where EUR/USD price is at 1.2345. On the chart we can notice what happens next, and that is a small pullback to 61,8%. This means that retracement has started. It is advised to wait for next Fibonacci ratio before trader makes a trade. If for example price reaches next ratio of 50% it is a good time to buy a call option. The price reached 61,8%, then it reached 50% and continued to move in the direction of the trend until it’s back to level of 0%, which serves as a level of resistance. From that level we can expect another retracement.
What to keep in mind?
Fibonacci retracement is not as straightforward as it may seem at first, so we strongly advise if you are a beginner do practice on demo account. When you get some experience you will be able to find the 61,8% level just by seeing it on the chart. Make sure you set up your chart time frames according to expiries that you trade. Fibonacci retracement is best used on forex pair with big volume like EUR/USD pair.
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