# Fibonacci Retracements For Binary Options

Updated on July 30, 2013

## The Fibonacci Sequence

The sequence of numbers we now know as the Fibonacci Sequence has been around since at least the 6th century. Fibonacci did not publish his book until 1202. The Liber Abaci is important because it is the first book introducing Arabic numerals and the Fibonacci Sequence to Western Scholars. Today, mathematicians begin the sequence with 0 but Fibonacci began with 1. The sequence is a series of in which the next number is the sum of the previous two.

• Fibonacci Sequence = 0,1,1,2,3,5,8,13,21,34,55,89,144,233

The significance of the Fibonacci Sequence is the Golden Ratio. The Golden Ratio states that two numbers are in the Golden Ratio if their ratio is equal to their sum divided by their maximum.

• (a+b)/a = b/a or a+b is to a as a is to b

The numbers in a Fibonacci Sequence approach the Golden asymtotically. What this means is that the Golden Ratio provides a limit for the ratio between any two elements of the Sequence. In fact, the formula for the Golden Ratio is inherent to the the formula for the Fibonacci Sequence itself. What this means is that if a number in the Sequence is divided by its predecessor the number approaches the value of the Golden Ratio, or 1.618033987. The resulting numbers in the sequence are alternating lower and higher than the Golden Ratio and converge on its value as the Fibonacci Sequence progresses.

## Fibonacci And Binary Options Trading

To understand Fibonacci Retracements and Fibonacci trading we need to start at the beginning. With the man himself, Fibonacci. I was first introduced to Fibonacci in grade school. He was featured in math posters and sidebar stories in my text books. His love of math and expansion of the field of mathematics are what he is best known for and what I learned in school. Beyond that, I did not learn much about him. He had some ratios, compared them to nature and created what is now known as the Fibonacci Sequence. That may sound familiar, especially if you've read Dan Brown's The Da Vinci Code, a novel of intrigue that features Fibonacci and Fibonacci Sequences as part of the main plot.

Who was Fibonacci? He was a prominent Italian mathematician in the middle ages. He is most famous for introducing and spreading the use of Arabic numerals in Europe but also for his sequence. What became known as the Fibonacci Sequence was actually already well known by this time but its use in Fibonacci's book, Liber Abaci, helped it gain the name. As for Fibonacci himself? His name is actually Leonardo Pisano Bigolo, also known as Leonardo Of Pisa. The Liber Abaci (Book of Calculation) was published in 1202. In it Leonardo described the use of numerals 0-9, place value and how to apply the new form of calculation to things like book keeping, money changing and building. Needless to say this book changed the way Europeans thought and is the basis for the modern math we learn and use today.

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## What Does This Mean For Binary Options

I'm sure by now you are asking yourself what does all this mean for binary options. Basically, it means that we can use the Fibonacci Sequence and the Golden Ratio to measure the stock market. Fibonacci numbers have been used for decades if not longer to provide targets for support, resistance and price movements. The theory can be applied to retracement, projected as lines, arcs or fans and even be used to predict when a market move will occur. The key to using Fibonacci is a strong trend. It doesn't matter if it is an up trend or a down trend but there must be a clear trend. The Fibonacci trading tools use that trend to predict potential areas of support and resistance based on the Golden Ratio. Areas are identified by lines, circles and arcs created by the tool. To use the tool simply draw a line from the start of the trend to its end. For an uptrend draw the line from the bottom of the first bar to the top of the last bar, including lower shadows.

## Fibonacci Retracement levels

There are several retracement levels based on the Fibonacci Sequence. These are not guaranteed levels but likely places for prices to reverse or continue. The trick is applying the Fibonacci Analysis to your trading in a profitable way. A basic rule for trading might be something like this; If price breaks through a retracement level enter a put, if it bounces enter a call. Expiration would depend on what time frame charts you are using. Daily charts may need a few hours or days for the trade to unfold. On the hourly charts a few hours or less until expiration may be appropriate.

• There are 7 Fibonacci Retracement levels ranging from 0% to 100% retracement. In between each level is based on the Fibonacci Sequence and the Golden Ratio. Levels are 0%, 23.6%, 38.2%, 50%, 61.8%,78.8% and 100% retracement. The tool will also project some targets above 100% and below 0%.

## Fibonacci Fans For Binary Options

Fibonacci Fans are another way to use the Golden Ratio to measure financial markets. The fan tool creates a series of rays that originate at the starting point for the measurement. The rays extend outward and provide potential areas of support/resistance and places where price action could change direction. Note how the support bounce first mentioned on the chart of retracements above is confirmed by a similar Fibonacci support bounce on the char of Fans.

## Applying Fibonacci To Binary Options

Fibonacci is a great tool for binary options. It can be used in any time frame and with any asset and provides clear targets for relief rallies and pull backs. Trading with Fibonacci is not all roses though. The tool does have at least one serious flaw; it does not predict market direction, merely where that direction is likely to reverse or continue.

So, in order to use Fibonacci successfully binary options traders will need to use other analysis as well. Use the retracement levels to confirm support and resistance determined with other means. You can also use it identify other possible areas of sup/resistance. To generate signals watch the retracement lines carefully for signs of continuation or reversal. If prices confirm support then call options are warranted. If prices break down below a Fibonacci level then puts are in order. Regardless of direction, targets for price movement exist at the next Fibonacci level, either higher or lower.

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• Larry P.

Thank you for posting this informative article.

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