Fibonacci tool is used as a trading analysis method to identify trading points that can be harnessed for profits. Although Fibonacci is a technical tool that may seem rather complicated, its application in financial trading is straight forward. Any Charting software have an inbuilt Fibonacci tool that automates calculations.
The nature of market trends is that they are constantly changing, from highs to lows and vice versa. The assumption is upon hitting a low, the market trend is bound to make a rise. Similarly, upon striking a new high, at some point the price will come down. This creates a pattern that has points of extension and retraction. The big question therefore is whether a trader can be able to predict the actual points of extension and retraction so as to use a retracement to their advantage. Fibonacci tool can be used as retracement tool to track these points.
The most common application of Fibonacci tool in retracements is to identify levels. To do so, one starts by establishing a move. Usually, it is a top point of a rise and the bottom of a low. The charting software allows one to connect the two points. In reference to the highest and lowest levels, the Fibonacci tool then calculates the ratios of variance and plots them as levels on the chart. The five most common Fibonacci ratios are 23.2%, 38.2%, 50.0% and 61.8% and 100%. These are the levels where either support or resistance is most likely to occur.
The logic behind the ratios is that following an uptrend, it is anticipated that the price of the asset will drop to at least the 50% level before resuming to the original trend. However, in the case that it does not resume, it is assumed that it will take a full retracement to reach the 61.8% level. The 61.8% level would be the ideal point to enter the market whereby one would trade towards the original move.
Effective use of Fibonacci tool in binary options trading
To optimize success in using Fibonacci tools, it is essential that a trader selects a strongly trending asset. Ideally, the indicator should be used within a select time frame that is relevant to the market trends at the time. As one gets accustomed to suing this retracement tool, they may be able to slightly adjust the percentile levels accordingly to be able to make more precise predictions. However, this requires high level of experience and expertise.
While Fibonacci tool plays a critical role to enable traders to identify potential entry points, it is important to keep in mind that these levels are just indications and not absolutes. They should only serve as a guide and not the final decision. The market is volatile, therefore predictions made are not 100% warranted.
Fibonacci tool can seem to be a complex concept. Nonetheless, it is integrated into tracking software in a way such that beginners can comfortably use it to make retracement predictions. Beginners can practice application of the tool on a demo account before applying it to actual binary options trading.