Fibonacci Retracement – Trading Binary Options with Fibonacci
There are two ways of analysing data when you are looking to trade in binary options. The first is known as Fundamental. This approach studies the reasons behind market movements. Just because a market is moving upwards does not mean it should be or will continue to do so. If you understand why it is moving in a specific direction you will be able to assess if it will continue in that direction or not. The second approach is known as Technical. This approach uses a variety of tools to examine market data, this includes current and past data; when all this date is examined it is often possible to predict when a trend will change; allowing you to place a trade which bucks the trend and carries a higher rate of return.
Fibonacci Retracement is one strategy which attempts to use both types of data analysis; it is often used by people who are either trading in future price movements or who are attempting to calculate them to assess the right time to make their trade. It is definitely one of the more complicated strategies but it also tends to be very accurate, when used properly.
The aim is to calculate when a given asset will stop moving in a specific direction. The strategy looks at past trends, analysing the patterns of historic trades to calculate which trend is currently occurring on the market.
The Fibonacci retracement strategy is based on ratios which have already been defined. In essence it uses two lines which can show when an asset changed direction and when it reverted to its original direction. These lines allow you to set an average line, or trend line. The pre-defined ratios can then be applied and will tell you whether to trade or not and in which direction. It is not easy to understand how the ratios are calculated or even why they work, but, research and application show that they do work!
As it is difficult to explain the exact process involved in this strategy it usually becomes very daunting for those new to binary options trading. However, they have proved to be exceptionally good at identifying an uptrend and ensuring you trade at the right time to maximize your rate of return. At the very least it should be incorporated into your trading strategy, although it can be used as a stand-alone strategy, if required.
The reason this approach works is that although markets may be unpredictable, human nature is not. The average trader will buy stock at a low price and hang onto it whilst it grows. As soon as they feel it has peaked they will start selling, this will cause others to sell and the upward trend will reverse. In many ways it is a self-fulfilling prophecy! The Fibonacci retracement strategy attempts to calculate at what point people will believe an asset has peaked and start selling. It should be noted that this strategy is a longer term one; you should not be using it for five minute trades!