When using Fibonacci retracement levels, the golden ratio of 61.8% is undoubtedly the most important, however it is not the only level which should be considered during trading. There are lots of other theories about Fibonacci retracement levels and among these, the most popular are the Elliott Waves Theory and the Gartley approach,
The Gartley approach states that when trading binary options, a trader should purchase put options as the market reaches the 80% retracement level, with the expiry date being set according to the timeframe on which the analysis is made. It has even been suggested that when adopting this strategy, a trader will be successful on three out of four occasions, and this results in an impressive binary options trading ratio.
Elliott Waves Theory and Fibonacci Retracement
When it comes to Elliott Wave Theory, retracement is only considered to be possible on corrective waves, and the first point to be considered when meeting retracement levels is to lookm out for an irregular, common or flat.
It is a popular saying that Fibonacci retracement levels without the use of the Elliott Wave Theory means nothing when participating in binary options trading, however in fact it is more likely the other way around i.e. there can be no Elliott Wave Theory without looking at the patterns using a Fibonacci tool, and the Fibonacci numbers are essential for technical analysis.
Although the 80% retracement level is not as well known, or indeed as important as the golden ratio of 61.8%, it is nevertheless a rewarding level. The Elliott Wave Theory states that when the market travels following an impulsive move, it will form a corrective wave, also known as Wave A. In these circumstances, the Wave A will be followed by a second corrective wave, the B wave, depending on its pattern and structure. The nature and level of the B wave retracement will be correlated with Wave A’s structure, giving investors the level at which the market will retrace.
In the case of binary options trading, this gives the trader the striking price.
Should the impulsive move that occurs prior to the A wave be a 5 wave bullish structure to the upside, then wave A’s nature was bearish. This means that the B wave will actually correct in the same direction as the direction of travel of the impulsive move, and therefore the trader should place a put option. As the wave’s structure is corrective, the minimum distance the B wave can travel will be 61.8% and therefore this is the level at which to place the first put option. Should the wave be a double combination i.e. being formed from 2 simple corrective waves joined by the connecting X wave, then wave B’s maximum retracement level must be 80%.
Using the Scaling Strategy
This introduces a strategy known as scaling, and in these situations, it is important to be able to scale into position by splitting the investment amount into several parts, using it to trade options with different striking prices but all in the same direction. This can be done by splitting to the distance between the 80% and 61.8% levels into, for example, four striking prices and options and then waiting for the market to get to those areas in order to trade the put options.
The expiry date should always be set according to the timeframe on which the pattern is forming, however the alternation of expiry dates should also be taken into account.
The 80% retracement level is found most frequently when using either the Elliott Waves Theory or the Gartley approach and it is important for traders to be able to use this level and to interpret the market correctly when the retracement level of 80% is observed.
Other educational articles
- How to Use Hedging Strategy to Manage Risk Effectively in Binary Options Trading
- Using Fundamental Analysis in Binary Options Trading
- Is It Possible to Successfully Trade a Flat Market in Binary Options Trading?
- Dealing with Expanding Triangles in Binary Options Trading
- Trading Double Combinations, One of the Most Complex Corrective Waves
- “Combining Fibonacci Retracements And The RSI.” TECHNICAL ANALYSIS OF STOCKS AND COMMODITIES-MAGAZINE EDITION- 21, no. 3 (2003): 16-23, Bucher, Ingo W.
- “Financial Analysis and Trading: Financial Engineering and Applications of Fibonacci Sequences.” ADVANCES IN GLOBAL BUSINESS RESEARCH (2012), Khoshnevisan, Mohd, and Soukanto Bhattacharya.