The Fibonacci numbers are incredibly useful for trading binary options with a variety of tools being available including the Retracement Tool, the Fibonacci Expansion Tool, arcs, time zones and other levels. All of these are based on an identical sequence of numbers and their projected levels indicate areas of support and resistance starting from the golden ratio of 61.8% and moving into secondary levels.
When considering confluence areas, it is important to understand the term as the market showing a stronger area which can be broken of a confluence of factors come together in the same location.
It is impossible to use the Elliott Waves Theory without the use of Fibonacci levels and being able to play with the various degrees of wave structure while keeping the same Fibonacci levels for the pattern being traded enables investors to find areas of strong resistance and support which translates into excellent striking prices in the trade of binary options.
What is a Confluence Area?
A confluence area is a location which is meant to offer strong resistance or support as in that area, there are different smaller degrees of resistance and support levels. While these levels of resistance and support do not necessarily have to act like classical ones (i.e. those that form horizontally), dynamic resistance and support levels also qualify (i.e. those that form vertically).
Fibonacci levels are one of the ways of finding these areas that are difficult to break. If the confluence area is acting as an area of support, a trader should purchase call options, whereas if the confluence area acts as an area of resistance, purchasing of put options should be considered.
To identify these areas, it is important to look at the various patterns that are being made by the market. Triangles are one of the patterns that appear frequently, however it is always well known that a triangle usually retraces a minimum of 50% of its previous leg, regardless of whether it is expanding or contracting. With this in mind, a trader should measure a triangle’s longest leg and mark where the 50% retracement level lies. Next, they should measure the triangle’s next leg and mark the 50% retracement level on it. This shows the confluence area which will be difficult to break, and by the time the E wave has been finished on the triangle, any move that has been made into this area gives the trader a good opportunity to trade an option.
Using Elliott Waves Theory to Find Confluence Zones
It is also possible to use Elliott Waves Theory to find areas of confluence that have been derived from the Fibonacci Levels. Experienced traders are aware that the key Fibonacci levels are 38.2%, 50% and 61.8% and therefore, they should measure a move from its bottom to its top and then mark all three of these key levels with horizontal lines. The investor should then move onto a larger time frame and measure the same move there using their Fibonacci Retracement tool to find the same three levels and plot another 3 horizontal lines to indicate where they lie. Should 2 or more of these lines come close to eachother, this is an area of confluence which will be difficult for the price to break. In the case of a bearish move, it is likely that the market will find support and therefore a trader should place call options, whereas in the case of a bullish move, put options are suggested as it is likely that the market will face strong resistance.
The confluence areas which are most powerful will combine both classical and dynamic support levels, and these can be identified with a technical indicator such as an oscillator or trend indicator such as a moving average. If the moving average crosses a classical area of resistance of support, future market price action is formed. Whereas, if the moving averages are travelling with no crossing, a strong area of dynamic resistance or suppport is being revealed which will be very hard to break.
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