It can be very rewarding to trade the 50% Fibonacci retracement level as long as the trader is aware of what to look out for. In technical analysis, the application of these levels is very wide as the Elliott Waves Theory has its own special way of handling the 50% level. It is also possible to use Fibonacci clusters, while the triangular classic pattern is a good way of finding a striking price for placing a binary options trade.
There are a number of important considerations when trading the fifty percent level. For example, traders know that in the case of the most common consolidation pattern, the contracting triangle, at least 3 legs of the triangle must retrace a minimum of 50% and commonly, a horizontal contracting triangle will end at around the fifty percent level. Being aware of this and calibrating the expiry date by using the timeframe on which the pattern is observed gives traders a key tool when trading binary options with a contracting triangle pattern that is based on the 50% levels.
It is widely believed that the 50% retracement level is second in importance only to the golden ratio of 61.8% and therefore, understanding how to apply it correctly forms a major part of a trader’s success when trading binary options.
50% Retracements in Impulsive Moves
Following the first wave of an impulsive move, commonly the second wave with retrace 50% to 61.8% of the initial wave before the extended wave begins. Therefore, a trader should buy call options during an impulsive bullish move or purchase put options in the case of an impulsive bearish move. Should the second wave’s retracement level extend beyond the 50% or 61.8% level, it is most probably the the 2nd wave will not finish there but only part of it will travel into the area. This indicates that Wave A will probably finish there with a B wave to the opposite direction being about the begin.
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Using Fibonacci Retracement Tools
The Fibonacci retracement levels are one of the best ways to find the ideal places to enter the market and trade. Many traders make Fibonacci levels their main way of trading, by simply drawing using the Fibonacci tool to discover the 50% retracement levels from lows to highs within their chosen time frame and then trading an option based on that result.
To do this, you simply open the largest possible time frame, a monthly chart, and observe all of the available candles before marking the lows and highs of that chart and using the Fibonacci retracement tool to identify the 50% retracement level. Afterwards, you move on to the lower time frames and repeat the exercise with the highs and lows there. When more than 3 levels are drawn on the chart, these represent the levels of resistance and support for future market prices and every time they are hit by the market, the right type of trade should be taken.
Using the 50% Retracement Level on Contracting Triangles
Contracting triangles represent a good opportunity to use the 50% retracement level. Both irreguilar and horizontal contracting triangles usually use the 50% level as a pivotal level. It is possible to measure the largest leg’s length and to then discover its 50% level, then drawing a horizontal line. In the case of a bullish triangle, it is likely that the market will be attracted to the 50% line and therefore below it is the best place to find good striking prices for call options. In the case of a bearish triangle, the 50% level is ideal for purchasing put options.
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- Steve Nison on candlestick charting. Technical Analysis of Stocks & Commodities Hartle, T. (1991). Roc, 9, 105-108.
- Fibonaccis are human (made) Kempen, R. (2016). IFTA J, 4-9.