In her book Fibonacci Analysis, author Constance Brown said, “To understand market expansion and contraction, you need to understand the difference between ratios, means, and proportion,” (Brown 2008, 16). The trader should at all times apply the standard Fibonacci resistance tool to the price action of the underlying market. Fibonacci ratios are a key pattern and apply to all price patterns. These ratios have been the subject of many books and studies.
No experienced trader ignores Fibonacci lines. If you don’t know them,it’s important to become familiar with their application. We really don’t know why traders use Fibonacci lines, but part of the reason is that it is a self-fulfilling
prophecy. As traders deem Fibonacci lines as important, they become important. Stops and limits and puts and calls are placed near them. They essentially work because traders believe they work. In any case, Fibonacci lines do not predict where the market will be. But they provide powerful markers as to where resistance and support will be.
For binary option trading, the weekly or daily, and four-hour time price charts will be an effective time frame to use.
For binary option trading decisions, Fibonacci lines are an important tool.When markets move in response to event risks, they often move in Fibonacci ratios. Here are the three steps involved for using Fibonacci lines with binary
option trading:1. Locate on the weekly or daily chart the appropriate Fibonacci line.2. After applying the Fibonacci line, determine where the price is in relationship to the key Fibonacci ratios. 3. Once you choose the binary option strike price you want to trade,determine which Fibonacci line the binary option strike price is near.
The results of overlaying the Fibonacci lines on the underlying market can be very valuable to the trader. The relationship between binary option strike prices and Fibonacci lines are important because they can confirm whether the intended strike price is the best one to use for a trade. If, for example, a trader goes long a binary option strike price, but that strike price is just above a key 61.8 Fib line, it means that there is likely to be great resistance encountered.The trade success is less likely, or requires a lot more momentum than anticipated. Fib lines can confirm a choice of a binary option strike price. If the spot market has just probed above a 61.8 percent Fib line and the trade wants to go with an in-the-money strategy, choosing the strike price right below the fib line makes sense.
The most important Fibonacci ratios used in trading are 38.2 percent,50 percent, and 61.8 percent. Fibonacci resistance lines on the day chart are the most important. Many underlying markets often have prices probing near the key day fi b lines. EUR/USD provides such an example. First we locate the EUR/USD chart and notice a signifi cant high was formed about May 9. Th e price action followed with a decline and formed a low.
Th e Fibonacci tool connects the high to the low and generates the Fibonacci ratios. At the same time, viewing the EUR/USD weekly binary option strike prices showed that the 1.4675 strike price was the closest to the actual 61.8 percent Fib line, which was at 1.4572 Th is is almost an exact overlay of a key Fibonacci line and a binary option strike price. Th e result is a confl uence of confi rmation that a trader loves to see from more than one technical condition. Th e trader looking to go long the EUR/USD would realize that a strong move was necessary to break through.