One of the more popular methods of predicting asset movement is through a sequence of numbers known as Fibonacci retracement. Many Forex traders use this method to help them figure out when to enter and exit a position within a currency pair, but it really can be used with any type of asset. With a good charting package you will be able to calculate these price levels automatically, but having a good understanding of what they mean and how these numbers can impact your trading is still necessary for being successful with this method of trading.
A Fibonacci retracement is a method of technical analysis that is sometimes used as a short term trading tool that can help traders predict future price movements. Fibonacci retracements are based upon the Fibonacci sequence of numbers where every new number is based upon the sum of the past two numbers. A common sequence would look like this, “1, 1, 2, 3, 5, 8, 13,” and so on. The most commonly used levels when it comes to short term trading are 23.6, 38.2, and 61.8. 50.0 is also sometimes added into the equation in order to give a stable point of reference.
How it works is quite simple. These numbers often act as support and resistance levels within the price chart of a given asset. Why it works is not entirely clear; it could even be a sort of self-fulfilling prophecy that traders make happen simply because they expect it to happen. Still, this happens often enough that it has become a viable way to help a trader make money.
When a currency is headed in a certain direction, it will often meet resistance at the 23.6 percent mark. So if a pair is headed down in price, when it reaches 23.6, the fall will level out or perhaps even slightly reverse. This resistance to change is usually short lived, and the price will continue within its predominant trend shortly. The same will often happen around 38.2 and 61.8 percent.
Fibonacci Method Trading
When you’re using Fibonacci retracement within your trading, how you use it depends upon your timeframe, especially if you are trading binary options. The common rule of thumb is that you should not trade against the dominant trend, and Fibonacci numbers do not go against this wisdom. Even if you are looking for profit in 60 seconds with binary options, you do not want to go against the trend, even if you are at a key price level. There is no way to predict how long this resistance will last. The best way to handle the situation is to pause your trading on the asset in question until the retracement period has passed. So if you are trading 60 second call options on the USD/CAD pair, and the price hits the 38.2 percent level, the best way to handle this is to simply stop and wait. Once the retracement period goes by, you can resume your trading.
So the best way to use this is as a warning system. Prices will pause at a certain level more often than not because traders expect them to. In reality, Fibonacci numbers don’t work on a mechanical level, but rather a psychological one. Still, it does regularly happen, and you need to be aware that it will happen if you want to be successful. During the points of resistance, prices will not follow the trend, but may go slightly up or down while stuck here. Even with 60 second options, the slight movements are not going to be profitable for you often enough to be worthwhile.