It is well known that the financial markets are always moving in cycles or waves, not straight lines. Therefore, in a bullish wave, a trader should not trade just one option, as this would be a poor decision. Instead, they should split the amount up into different entries and then look for some possible trading places by identifying retracement levels. An investor can find retracement levels by adopting the Fibonnaci levels, with the most important ones being 38.2%, 50% and 61.8%.
Using Splitting to Discover the End of a Wave
These important Fibonacci levels represent the usual places where corrective waves end, so if a trader splits their entry up into different amounts and purchases call options at the 61.8%, 50% and 38.2% levels in a rising trend, they are much more likely to enjoy success, with their option expiring in the money.
Fibonacci numbers can be determined in technical analysis of trading with the Elliott Waves Theory. All of the patterns in this theory have a relationship with Fibonacci retracement levels, and therefore without them, this theory is completely useless.
Finding a Five Wave Structure
When the technical analysis chart forms a zigzag pattern no part of the B wave can retrace more than 61.8% of the first wave. As a zigzag wave is a 5 wave structure, representing an impulsive move, all a trader has to do is find a 5 wave structure for the wave. This can be done by using a Fibonacci retracement tool to measure the wave’s entire length, and as no part of the B wave is able to retrace more tha 61.8% it is possible to scale into a position i.e. find the ideal striking price in the move by trading a small amount than originally intended. It is also possible to play with the expiry date of your options by splitting the total amount to be invested into 3 parts.
Buying Call Options on a Fibonacci Retracement of 23.6%
It is recommended that traders buy call options on a dip to the initial important Fibonacci level, the retracement of 23.6%. This options should also have the largest expiry date of all as the price may still dip lower. This option should be in the sum of a third of the original total investment and its expiry date could be any time from end of week to end of day expiration.
Entering Call Options on a Fibonacci Retracement of 38.2%
Following this, a trader should place a call option at the Fibonacci retracement level of 38.2% as this is the level that the market is most likely going to retrace in a zigzag pattern. Here, it is possible to use a larger investment sum as well as a lower expiry date, perhaps half of the size of the original investment sum with an expiration date of end of day or end of week if the zigzag is forming on an hourly or four hourly chart.
Investing the Third Part of the Split Sum
There is now one last part of the initial investment amount left with which to place a trade and the remainder of this initial amount can be traded at any point between the 50% Fibonacci retracement level and the Fibonacci retracement level of 61.8%. This represents the invalidation of the pattern. Having traded all three split parts of the original sum, the investor has therefore scaled into position using their original investment amount using different expiry dates in order to diversify their portfolio without taking bearish risks.
Other educational articles
- What are Japanese Candlesticks in Binary Options Trading?
- What is the Contracting Triangle Pattern in Binary Options Trading
- What are Impulsive Waves in Binary Options Trading?
- What are Corrective Waves in Binary Options Trading?
- Triangles as Continuation Patterns in Binary Options Trading
- “A high performance pair trading application.” In Parallel & Distributed Processing, 2009. IPDPS 2009. IEEE International Symposium on, pp. 1-8. IEEE, 2009, Wang, Jieren, Camilo Rostoker, and Alan Wagner.
- A computational exploration of the efficacy of Fibonacci Sequences in technical analysis and trading Bhattacharya, S. and Kumar, K., 2006.