It is often said that the Elliott Waves Theory cannot exist without using Fibonacci retracement and expansion tools and this is certainly the case. The Fibonacci Tool is used frequently, both in trading impulsive and corrective moves and on every type of retracement.
Here are some examples of when to use the Fibonacci Tool
Traders should use the retracement tool to measure the first wave’s length when they are looking for a second wave to retrace between 50% and the 61.8% levels as compared to the first wave. Should the 1st wave be bullish, or representing a move to the upside, they should purchase call options once the price reaches that area. In the case of a put option, the opposite is true.
If a trader is looking for a B wave in corrective structures, they should look to the 61.8% level as this makes the differences between zigzags and flats.
When triangles are being traded, an investor is aware that 3 out a triangle’s 5 legs need to have more than 50% retracement, and this level can be found with a Fibonacci retracement tool.
These are just some of the situations where the Fibonacci Retracement Tool is useful in trading binary options.
Fibonacci numbers can be found everywhere and are vital to technical analysis of the financial market. All trading platforms offer Fibonacci tools, varying from Expansion and Retracement tolls up to Time and Arcs tools. Indicators can always be edited as well as levels added as various Fibonacci expansion or retracement levels are used depending on the trading theory in use.
When using Elliott Waves Theory, Fibonacci Levels are divided between those that are used for corrective and those that are used for impulsive moves. This is vital as corrective moves have obvious limitations while impulsive moves have their own particular conditions. In impulsive moves, the 2nd wave is unable to retrace further than the beginning of the 1st wave. No part of the 2nd wave can retrace below the start of the 1st wave, making 100% retracement levels impossible. This however is possible in corrective waves, as for example, in a flat a B wave is able to retrace further than 100% as compared to the length of the prior A wave. Fibonacci expansion tools can be used to see if the retracement is larger. In corrections with big X waves, the same level is able to be used as the corrections will always travel over 61.8% as compared to the prior correction, and in most occasions, the entire previous correction will be 100% retraced.
Using Fibonacci Extension Tools
To find the extended third wave in an impulsive move, a Fibonacci Extension tool is able to be used. By dragging the tool from the start of the 1st wave to the ending point of the 2nd will help to find the length of the 3rd wave. 161.8% is just the third wave’s minimum requirement, and often, it will reach a much greater level up to 261.8%.
It rarely occurs that the 4th wave retraces more than 38.2% as compared to the prior 3rd wave’s length and therefore, by the time the level of 23.6% is reached, a trader should consider purchasing call options during an impulsive bullish move or put options for an impulsive bearish move.
A 5th wave during an impulsive move is always tricky as it depends on the extension time. If there is a 3rd wave extension, a trader should look out for the rule of equality between the 1st and 5th waves and this will give adequate information on which to base trading opportunities. If, on the other hand, it has a 1st wave extension, traders should buy put options on moves following completion of the 4th wave.
Elliott Waves Theory and Fibonacci tools work in harmony together, with Fibonacci being key to giving the striking price for successful binary options trading.
Other educational articles:
- Elliott Waves – The Implications Of A Running Correction To Reduce The Risk Of Painful Trading
- Elliott Waves – Insights For Trading The 2-4 Trend Line Break To Increase Your Profits
- Elliott Waves – How To Trade 5th Waves Extensions Impulsive Moves
- Profit From Trading Rare Fifth Waves Failures With Elliott Waves
- Trading The Apex Of A Triangle For Profitable Binary Options Trading
- How To Use The Principle Of Alternation To Profit From Differences Between Corrections
- Cash Return on Capital Invested, Ten Years of Investment Analysis with the CROCI Economic Profit Model, Pascal Costantini 2006
- A brief history of mathematics in finance, Erdinç Akyıldırım, Halil Mete Soner