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Fibonacci Retracement Strategy

The Fibonacci retracement tool is widely used by binary options traders, although it can present a challenge to those who are trading for the first time. This indicator is powerful though, and because of this, it is worth the time invested to learn how to use it correctly. The strategy outlined below is designed for use with Call/Put or Touch contracts and can be used by any trader who has some knowledge of price charts.

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Retracements are among the most important components of any upward trend of price movement, regardless of the strength of the trend. For that reason, it only makes sense to construct a trading strategy around these price movements. How come retracements such integrated components of every financial markets though? This is due to the fact that the nature of trading is such that traders who bought into a given asset early will be looking to stop and lock in some profits at some point, which leads to a temporary reversal of the prevailing price trend.

Due to the fact that this strategy is dependent upon a price trend, daily charts should be used for analysis. The reason behind the use of a daily chart is simple – the smaller time-frames, such as hourly, are rendered ineffective due to of all the market noise which occurs throughout the day. Daily charts offer the best overall view of the market conditions, which is exactly what is needed in order to properly identify dominant price trends.

How does this binary options strategy work? The goal will be to locate the point where retracement movement ends. The Fibonacci retracement tool will be used to do this. The asset price is going to move back to the prevailing price trend at a Fibonacci level, and this will be shown by the retracement tool. At which level will this occur though? The Fibonacci retracement tool includes 5 key retracement levels. These are placed at 23.6%, 38.2%, 50%, 61.8%, and 100% of the levels. A trend-reversal is likely when the price of an asset reaches any of these levels.

The Fibonacci indicator is used by first drawing a line to link the lowest asset price of the selected time-frame with the highest price of the selected time-frame. These are also referred to as “swing high” and “swing low”. After this step has been completed, identifying the price movement on the chart, each of the 5 Fibonacci levels will be presented on the chart in the form of horizontal lines, at the percentages listed above.

Statistically speaking, most retracements pass through the first two levels without any problem, so if using a Touch trade, the strike price should be around the 38.2% mark, but this should only be after the retracement has exceeded the 23.6% level. The expiry time on this type of trade needs to be 10 days. Such a long expiry time may not seem appealing, but it does increase the odds that the position finishes in the money.

If you’re new to trading or have never used the Fibonacci retracement tool before, be sure to paper test this strategy several times before using it. With just a bit of practice, it will become quite clear the role that these levels can play in accurately forecasting price movement. This indicator, especially when paired with others, can provide you with the type of accurate price movement predictions needed to rake in huge profits from binary options trading.

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