Fibonacci Retracement – How to trade with Fibonacci

Fibonacci Retracement – How to trade with Fibonacci When it comes to trading binary options, it is widely suggested to take into consideration both technical and fundamental forms of analysis. Fundamental analysis often deals with the reasons as to why a particular market is moving when it hits a certain indicator line and technical analysis then uses other methods to further predict trend reversals. Fibonacci retracement is an analysis technique which makes good use of both fundamental and technical data.

Fibonacci retracement is an investment analysis strategy that is available to traders that is widely used when forecasting future price movements. It is a bit more complicated than some of the other binary option investment strategy tools, but it can be an extremely accurate predictor when used and analyzed properly.

Fibonacci retracement is a technical analysis term that tries to identify a future area of support (one where price stops going lower or higher) after an original price movement starts taking place. It does this by looking at historical data along similar time frames to look for similar patterns in the past when this takes place and comparing them to what patterns are taking shape presently.

Fibonacci retracement is charted by using two horizontal lines that help to identify areas of resistance or support before a market then resumes trending in the original direction. It establishes a trend line that is drawn by connecting two extreme points and then uses preset ratios (such as 100% – 61.8% – 50% – 38.2% – 23.6%) to divide the vertical distance of these extreme points. The 61.8% ratio has long been referred to as the golden ratio or golden mean.

It is not easy to simply explain why these number ratios work, but they have been proven to do just that over time. Fibonacci first used these ratios to prove their importance in nature in mathematical models, but they have proven to be strong indicators of where strategic trades should be placed too. This makes Fibonacci retracement the least understood analysis and the most intimidating strategy for new traders.

Make no mistake about it though, retracements can be a key component in identifying an uptrend and can pick them out whether they are strong uptrends or not. Given this, it is extremely practical to build a trading strategy based on them.

What makes a retracement a vital component of market analysis? The answer is easy, the traditional inherent nature of markets and trading suggests that a trader that got on board early on a particular asset will look to get out with some profit before the trend reverses itself causing losses; this in turn creates the inevitable trend reversal. This type of reversal trend is usually jump started by the conservative nature of institutional traders.

This also tends to make Fibonacci retracement and its trend dependence prone to be best used on daily charts as opposed to much more market noise sensitive shorter time frames. So be sure to avoid using shorter time frame charts when analyzing using the Fibonacci retracement method.

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References and Further Reading:


2. Trading Rule Generation for Foreign Exchange (FX) (H Iba, CC Aranha – 2012)

3. Interactive control of a website-based trading platform for automating the allocation of a user’s investment amount on one or more signal providers (L Yohai-giochais – 2012)

4. Sentiment Derived from News Predicts EURUSD Movements (PA Hafez, J Xie – 2013)

5. Performance evaluation of decision-making agents’ in the multi-agent system (J Korczak, M Hernes, M Bac – 2014)

John Miller
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John Miller

John has worked in investment banking for 10 years and is the main author at 7 Binary Options. He holds a Master's degree in Economics.
John Miller
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