Trading Options Using Fibonacci Retracements

Trading using Fibonacci retracements is one of the most simple yet very effective tools you can add on top of almost any binary and standard options strategy. Without going into the math details behind why it works, Fibonacci lines are support and resistance values where price is likely to reverse. The most common retracement values are 23.6%, 38.2%, 50%, and 61.8% towards the previous minimum or maximum. Most charting platforms will draw the retracement lines once you label the the local minimum and maximum. Let me show you some examples from the AUD/USD

Daily price chart for AUD/USD from September to December. Click to enlarge.

Notice how price starts to go back up but then reverses when it hits the 61.8% retracement line and resumes the previous downtrend. Here's another example.

Monthly candlestick chart for AUD/USD. Click to enlarge.

This time price is in an uptrend and starts to go down and then reverses when it hits the 38.2% retracement and then continues the uptrend.

A few important notes when using Fibonacci lines to make money at binary and standard options.

1) Only use Fib. lines when the market is trending. They won't work when the market is ranging as the market would likely retrace all the way back to where price originally was.

2) Fib. lines work better on higher time frames. Price has a much higher change of reversing when it hits a Fig. line based off a 4 hour, daily, weekly, or monthly chart than a 5 min. chart.

3) The Fig. lines should be treated the same as support/resistance lines in terms of when to enter a trade. In other words, wait for conformation in candlestick patterns/price action before entering a trade. Fibonacci lines are another tool that can tell you that price might be reversing. As you can see above, Fig. lines by themselves are by no means a guarantee of reversal. More about candlestick patterns  Here.

2/19/15 Technical Analysis