Contents:Fibonacci Retracement is an innovative technical strategy based on the Fibonacci tool, developed to detect more stable retracements. Compared to the original Fibonacci usage, the new system is considered much more effective. This article will show you in detail how to apply this strategy to collect binary options trading opportunities.
What is Fibonacci Retracement?
As you already know, the Fibonacci trading tool is highly appreciated by many traders due to its accuracy in spotting bounces/reversals. It’s mostly applied to determine hard support and resistance barriers. Therefore, in that logic, let’s say you draw two Fibonacci retracements and see some overlapping levels, surely they are ‘stronger’ and likely to halt prices better than the separate thresholds, correct?
The good news is, both Fibonacci Retracement and Extension can be used in this way, and this technique could be applied to any financial assets, from currency pairs, commodities, indices to cryptocurrencies. However, in order to make this strategy work, you must know how to combine the Fibs correctly. Let’s review some practical trading examples to find out how to use this Forex Fibonacci strategy precisely.
The most popular Fibonacci Retracements are 61.8% and 38.2%. Note that 38.2% is often rounded to 38% and 61.8 is rounded to 62%.
How to use Fibonacci Trading Strategy?
Remember - the larger the trading time frame is, the more accurate the signals are.
Let’s say you are watching an uptrend. In a bid to identify the obstacles that prices may bounce at, you draw a Fibonacci retracement. The first point is the lowest point of the trend, while the final point is the highest swing high.
After having the first Fibonacci retracement, your work is to create a smaller one to seek the overlapping levels. The smaller Fib’s first point will be the nearest swing low (must be easy to look), while the final point is at the same place with the large Fib’s ending point.
As you can see, the 23.6% level of the large Fib is very close to the 50.0% threshold of the smaller one. That support area is highly reliable and sufficiently strong to force prices to retrace.
On the contrary, you can create a large Fib in a bearish trend by drawing from the highest point to the lowest swing low of the trend. The smaller Fib is made in the same manner as in an uptrend: drawn from the nearest swing high to the lowest swing low. Of course, the swing high must also be obvious.
Fibonacci Retracement Rules
There are some rules when trading with this strategy:
- The pump candle must be fully close before a signal is confirmed valid.
- Prices must show signs of reversal when approaching the overlapping barriers.
- Only one position should be entered at a time.
- The order’s expiry could be set 5 times larger than the trading time frame. For example, you can set the finishing time to be 5 days when trading on the 1-day chart.
If you like this strategy, you might also be interested in this Fourteen Trading Strategy
Pros and cons of the Fibonacci Trading Strategy
- Highly flexible;
- Generates accurate signals;
- Requires no additional indicators;
- Doesn’t requires a constant observation.
- Requires a high level of patience;
- Confuses traders sometimes by the multiple lines.
The Fibonacci forex strategy is an improved version of the original Fibonacci technique, allowing traders to determine more reliable retracements. Nevertheless, it’s also more complicating, requiring us to be more selective. We suggest only using this strategy when you have an intermediate knowledge of technical analysis, including Price Action. In addition, risk controlling and psychology managing methods must always be used alongside.