How does Fibonacci Resistance Lines Work?

How does Fibonacci Resistance Lines Work?

Submitted by adil on Thu, 09/11/2014 - 10:57

Utilizing Fibonacci Resistance Lines

Every trader should know how to use the Fibonacci Resistance lines on the price action. In fact, the Fibonacci ratios carry great importance among binary traders, because it can be applied to all the price patterns. Straight lines are used to represent the support and resistance points on the key Fibonacci levels before they move toward the original point. These levels are formed by creating a trendline between two extreme ends, after which the vertical distance is separated by the fundamental Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%. If you are a binary trader, you can easily find the high and low appearing on a price chart. Fibonacci links these high and low, and as a result, Fibonacci ratios are formed.

 The Fibonacci Retracement is a prospective retracement of the original price movement of a financial asset. Stops and Limits are visible near the Fibonacci lines, and you can also see Puts and Calls in that area. Although, you cannot predict the market of the underlying asset by using Fibonacci lines, yet, these lines can be used as the markers to identify the support and resistance points. This is the reason why binary traders prefer to use it, whenever they trade in the binary options market.

A reasonable time period to trade the binary options is a weekly, daily and a four-hour time price chart. When you observe a market reaction or even if there is a variation due to risk, they usually direct toward the Fibonacci ratios. You can use the Fibonacci lines as follows:

• Find a suitable Fibonacci line by using the weekly or daily chart.
• Identify the point where the price is linked to the Fibonacci ratios once you apply Fibonacci lines.
• Once you choose the strike price of the binary options, identify the Fibonacci line that is close to that strike price.

The result of using Fibonacci lines in the market of an underlying asset carries a great value for a trader, because the relationship between these lines and the strike price confirms whether the selected strike price is the right choice to use in trading.

It can also be explained with the help of an example. Let’s suppose, the trader chooses a strike price for binary options trading and that strike price is a little higher than a Fibonacci ratio of 61.8 percent. This shows a higher chance of resistance, which means that there may not be a possibility to have a profitable trade and a lot more momentum will be needed than it was previously assessed.

The Fibonacci Lines can assist the traders to locate the price of the binary options when the spot market reaches above the 61.8 percent. However, if they wish to trade ‘in the money’ strategy, selection of Fibonacci lines above the strike price will be a wise move.

Being a binary options trader, you should be able to locate the patterns that appear in the price action. These patterns or signals represent the sentiments of the markets. A key point to remember is that the binary option trade is majorly dependent on a direction. Therefore, traders must analyze the pattern and keep their emphasis on trend analysis, so that they can learn to take decisions with confidence and increase the likelihood of getting successful trades.