How to Use the Fibonacci Expansion Tool in Options Trading?

The Fibonacci tool comes with the trading platform and represents a great indicator that can help options traders to optimize their trades. It features retracement, expansion, time zones which the trader can use to find the perfect striking price, as well as the expiration date that is required to cash in the trade.

The Fibonacci Retracement enables tracking down waves, and the Fibonacci Expansion indicates impulsive moves. Fibonacci also takes into account expiry periods so it offers the Fibonacci time zone. Out main focus at the 7BO binary options education will be the Fibonacci Extension tool and how it can be used in trading and what benefits it offers.

The Fibonacci Extension Tool Explained

Every options trader is aware that the time factor is crucial when trading, and the Fibonacci tool can help traders earn some money if the relevant time period has been chosen.

Our examples are based on the most frequent pattern found in the options market, i.e. the impulsive move based on the Elliott Waves theory. The goal is to extend one wave minimum, which in practice often turned out to be the third wave. After a trader identifies what could be the first way, he is supposed to use the Fibonacci tool for extension and wait until a 161.8% extension is possible between the previous and the current wave. To activate the extension tool, a trader simply has to click at the beginning of the first wave and at the end of the second wave and wait for the outcome which should take place at the level of 161.8%. if the level is not reached, it means that the move was not impulsive meaning that the estimate that preceded the setup of the extension tool should be reconsidered.

The Fibonacci Numbers as Predictors

Fibonacci is a common tool used in numerous technical analyses which only reinforces its significance in trading. Pattern-based predictions rely heavily on the Fibonacci numbers since otherwise, they might not even be possible. The Fibonacci Expansion tool’s role is to figure out the extended waves in an impulsive movement.

When an impulsive move is displayed, then the price will move radical enough to extend one wave which can be spotted immediately since it is a very long stand out of the rest. The Fibonacci Expansion tool is used to find the exact spot of the minimum limits that characterize the wave extension.

We can illustrate that in the following example. Let’s say we have an upside movement and an accelerating market, but our market analysis suggests that the wheel will turn in a given moment. Traders should look at the length of the first wave higher and calculate the 161.8% extension of it in order to find the potential level and to know when to strike.

Search for Extended Waves

An educated guess would be to apply the extension from the second move to the end of the third move with an expiration date within the timeframe that displayed the impulsive move and then, place a put option to strike the right price.

Extended waves are the best to be looked for upon important news releases, prior to economic important events, since they are strong indicators of impulsive moves. Intensive movements are usually triggered by an important news. News like GDP release, Unemployment rates and inflation, retail sales, can all influence the monetary policy of a country to change, which further on, will keep the market moving.

Corrective Waves and Fibonacci Waves

Corrective waves are also very suitable to employ the Fibonacci Extension tool including a flat b wave which can become strong and break the wave’s high or lows, which depends on whether the wave is rather bullish or bearish. In such a situation, the b wave’s push over the 161.8% level would indicate that the upcoming c wave is not going to break the high/low of the previous wave a, which suggest that the best thing to do is to trade a call option when the trend reaches the wave an area.

The Fibonacci Expansion tool is easy to find on any platform. It is always listed on the menu and can be automatically selected. The exception is the Meta Trader platform, where you have the option to insert Fibonacci Expansion, and this process is also very simple requiring only clicking on it and dragging it to the screen. The Meta Trader Fibonacci Expansion tool is limited in terms that it is is not supported if you are looking for running correction waves. For example, if the bearish corrective wave is found above the end of the preceding bullish movement, it means that the Fibonacci tool is not available with the MT 4. But, other platforms like the JForex, support the tool even in this kind of cases, so you do not have to limit yourself to the MT4 if you want to experience the Fibonacci Extension tool to the fullest. This tool is one of the most common indicators used for trading, and once a trader finally understands when to apply it, it can account for significant profits in your account balance.

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References and Further Reading:

  1. Optimal production run for a process having multilevel tool wear (M. A. RAHIM & A. RAOUF)
  2. A new digital image scrambling method based on Fibonacci numbers (Jiancheng Zou ;  R.K. Ward ; Dongxu Qi)
  3. Power law growth for the resistance in the Fibonacci model (B. IochumD. Testard)
  4. A Proof of Fibonacci Triangles Conjecture with k=11 (LIN Li-juan)
  5. System and method for predicting stock prices (Robert Levinson)

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