Fibonacci retracement levels
The Fibonacci retracement tool can be successfully implemented in your daily trading if you know how to use it.
I would recommend practicing this strategy at a reliable broker which offers short term trading options.
Learn Fibonacci basics and how to draw Fib lines. Check out my trading examples on EUR/USD and find out how to execute more successful Call/Put trades using the price trends.
The name comes from the famous Italian mathematician Leonardo Fibonacci who developed a sequence: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233…
21 + 34 = 55; 55 + 89 = 144
Meaning that each next number is equal to the sum of the previous two.
The Fibonacci retracement is calculated by dividing the higher numbers in the sequence:
55/89 = 61.797%, 89/144 = 61.805%
In trading the Fibonacci retracement is simply a drawing tool which separates the chart in the following levels: 23.6%, 38.2%, 50,0% and 61.8%.
The key level to be monitored on your chart is 61.8%.
Essence of the strategy
The idea is to locate a trend on the chart (up or down) and pullback (retracement) after which the trend will continue in the same direction. You have to enter the market at the pullback with a Call or a Put option depending on the trend Up or Down.
You need to draw the Fibonacci lines in the direction of the move in order to locate the retracement – the point where you trade.
In an uptrend you draw the Fib lines form the Lowest to Highest point of the trend and the opposite way for a downtrend.
When you are using the Fib tool your aim is to define at which level the price action will stall. Ideally the retracements will start on the 50.0% Fib level or even better on the 61.8% level.
In the following examples I am trading EUR/USD in short term options: 5 minutes.
You see a clear uptrend where I am drawing the Fib lines from Low to High.
100,0% level is on Low where EUR/USD price is near 1,35160
There is a small pullback on the 61.8 level which can be entered with a Call option after which follows a confirmation at the 50.0 where I started to buy Call options. The price move dropped first to the 61.8 level then to 50.0 and continued its move in the direction of the trend.
100,0% level is on High where EUR/USD price is near 1,35940
You can see on the chart there are two pullbacks on the 50.0 level. I took the second one as a confirmation for a retracement after which the trend made a strong move to the downside. In such a case when you have a confirmation you can continue buying Put options on the pair.
To be successful on this strategy
- Trade highly volatile markets such as Forex
- Get some experience with the Fib tool so that you are able to find the 61.8% level just by eyeing it
- Set up your chart time frames according to the expiries that you trade
- Start to practice on a demo account
These are the basics of Fibonacci retracements so you can expect more articles to come on this subject. I hope this strategy will be useful for your binary trades and should you have any questions feel free to contact me in our forum.