The key to success when trading binary options is to find the correct striking price. This is something that takes a lot of patience, and many traders find that this is their downfall. Fundamental analysis must be combined with technical analysis in order to achieve success, and for this, Fibonacci levels are essential.
While you may be aware that the most important Fibonacci level is the golden level of 61.8%, it is not just a case of purchasing put or call options whenever the asset price reaches this level. Instead, a trader needs to take into account the pattern which is forming and then apply the corresponding Fibonacci levels to it. For example, if you are trading a contracting triangle, a lot of retracement will be required for the leg and therefore, observing for a level of more than 61.8% is necessary. However if the pattern that you are trading is a zigzag or a flat, the key for both of these patterns come from the level of 61.8% i.e. in the case of a flat, this level is mandatory while in the case of a zigzag it should be avoided.
According to Elliott Waves Theory, an impulsive move can be expected following a 50% to 61.8% retracement level. Elliott Waves Theory and Fibonacci numbers cannot function without each other, and the entire Elliott theory is actually based on using Fibonacci numbers to find the ideal striking prices for trading.
Any impulsive moves will have an extended wave and that extension will be considered to be a wave which is larger than the level of 161.8%. Although this is the minimum level a wave can be to be considered to be extended, trading an option to the opposite direction is the ideal way to go once the 161.8% level has been reached.
Identifying the Correction Type the Market is Forming
In the case of corrective waves, the 61.8% Fibonacci level will help a trader to discover the type of correction that is being formed in the market. For instance, if the market is forming in a flat pattern, a trader can compare the Fibonacci retracement of the A wave and the B wave to find out what type of flat it is. In this situation, the levels of 138.2%, 1236% and 80% will be good places to trade binary options to the opposing direction when looking for the new impulsive move of the C wave to form.
Traders tend to expect the 3rd wave of the 5 wave structure to be the largest, however this is not always the case. Traders should also look for the 2nd wave to retrace between 50% and 61.8%. This area gives the best chance of profitable striking prices for a call option should the impulsive move be bullish.
Finding the Right Striking Price
It is also possible to use Fibonacci Levels to find the correct striking price by using the Gartley method. This depends on the retracement level of 80% in a 4 wave move (A-B-C-D). Once the level has been reached, it is possible to trade an option in the opposite direction. Although the Gartley method may be considered to be quite risky, it is still a good trading tool because of the good rate of return on the investment.
When using Elliott Waves Theory and interpreting Fibonacci Levels, the extensions on a move aren’t just related to the 161.8% level. Although this is the minimum level, extensions of 261.8% or as much as 461.8% are also often seen, and the more impulsive the move, the more aggressive the option traded must be.
Most commonly consolidation areas will form a triangle, with the leg of the triangle virtually always breaking the 50% retracement level when it is compared to the prior leg of that same triangle. To trade a successful option at that point, an investor should trade call options during a bearish move with an expiry date that is bigger than the timeframe on which the triangle is forming.
Other educational articles
- Elliott Waves – The Implications Of A Running Correction To Reduce The Risk Of Painful Trading
- Elliott Waves Analysis Really Works – Complex Corrections Patterns Included
- Use Simple Corrections In Elliott Waves Theory To Master The Market
- How to Use a Risk Reversal Strategy to Avoid a Large Part of Your Risk While Trading Binary Options
- What is the Pinocchio Binary Options Trading Strategy?
- How to Use Hedging Strategy to Manage Risk Effectively in Binary Options Trading
- Using Fundamental Analysis in Binary Options Trading
- “Practical Fibonacci Methods For Trading.” Marshall, Ken, and Rob Moubray. System Research Company (2005).
- A Swingtum theory of intelligent finance for swing trading and momentum trading. Pan, H. P. (2004). Intelligent Finance―A Convergence of Financial Mathematics with Technical and Fundamental Analysis, 475-451.