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Chart analysis for binary options trading
The nuts and bolts of binary options trading are relatively straightforward. To make a longterm profit and avoid heavy losses however, you need to develop a solid trading plan and get your analysis right.
In this lesson we will focus on how technical analysis and the use of price charts can help you determine which asset to trade, which direction prices will move, what time frame will work best for you and at which levels you should enter trades. We will also introduce some of the main technical indicators that binary options traders find useful.
The importance of charts in binary options trading
Technical analysis involves the study of charts to identify historic patterns in a price that tend to repeat themselves under similar conditions. It is considered the most reliable form of analysis for binary options traders and will help you form a view on how prices are likely to behave in the short and long term.
Technical analysis: the basics
Most technical analysis relies on the historical observation that asset prices have a tendency to hit areas of support or resistance through which they struggle to fall or rise, respectively. If these barriers are broken, price movements in the direction of the breach often gain momentum.
There are two main approaches to technical analysis that can help you identify support and resistance levels and predict how prices will respond to them: patterns and technical indicators. Some binary options traders favour one over the other. Many use a combination of both.
Traders who focus on technical indicators rely on indicators such as MACD, ADX and stochastics to alert them to trading opportunities.
Traders who focus on patterns try to identify specific shapes such as socalled ‘double top’ and ‘head and shoulders’ patterns as they form on their price charts.
One of the key challenges with this analysis style is that reallife chart patterns are rarely as picture perfect as the textbook examples. Traders therefore have to make a decision on whether what they see on their chart is a bonafide trading signal or not. As prices are constantly in motion, they also have to learn to anticipate a pattern forming before it completes, and to act on it fast.
Whichever approach you decide works for you, be careful not to overcomplicate your analysis by focusing on too many indicators or patterns at once. A cluttered chart is hard to read and less reliable.
How to choose an asset to trade
Choosing the right asset or assets to trade with binary options can be key to your success.
It is possible to trade binaries on a wide range of underlying assets, from stocks and indices to commodities and foreign exchange, so make sure you choose a broker that offers you plenty of flexibility.

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Different assets behave differently, and some work better with certain indicators, price patterns or time frames than others. Foreign exchange markets, for example, tend to move fast. A binary options trader focusing on the USDGBP currency pair will therefore probably want to use charts with shorter time frames than might a trader of an industry index.
Be careful that you don’t try and trade too many assets at once – it’s far better to familiarise yourself with one or two and master your approach to them.
How to identify a trend or trend reversal
Because binary options trading at its heart involves betting on whether an asset price will rise or fall, identifying price trends and recognising when they may be about to run out of steam or change direction is one of the most important skills you must develop.
For traders that rely on technical indicators, one signal that an upward trend could be about to switch direction and reverse to the downside is when moving averages display a downward cross. When moving averages show an upward cross, this can signal that a downward trend will change to an upward move.
Another way that binary options traders can form a view on whether an existing trend is going to continue or reverse is by looking out for the socalled 123 setup.
This setup forms when the price of an asset continues moving higher or lower in the direction of an existing trend but then stops and pulls back slightly before continuing the trend.
One way of identifying the 123 setup is by monitoring Fibonacci levels to see if the price pullback is greater than 38.2% of the previous move. If it isn’t, most binary options traders conclude that the trend will soon continue and use the pullback as an attractive entry point for a new binary trade in the direction of the original trend.
If the 123 pattern fails to complete and price pullbacks are greater than 38.2% of the previous move, binary options traders often conclude that the trend is reversing. A doublebottom shape resembling the letter ‘W’ will sometimes form on the chart before the reversal gets underway.
Some binary options traders meanwhile use a combination of the Fibonacci retracement tool provided by most charting software and the stochastic oscillator.
The Fibonacci retracement tool helps traders identify when a price correction or retracement in the midst of a wider trend is about to end and the initial trend continue. As with the 123 setup, it allows traders to buy binary options traders at around the point the trend restarts.
To ensure a high probability trade, many will also wait for the stochastic oscillator – a technical indicator that identifies when a price has become ‘overbought’ (over 70 on the indicator index) or ‘oversold’ (below 30 on the indicator index) – to tell them a reversal is likely.
How to choose a time frame and expiry time
Price charts are broken into small bites known as time frames. These typically last for 1, 5, 15, 30, 45, 60 or 90 minutes, or for a whole day, week or month.
Most binary options traders start off using daily or weekly charts, and then graduate towards shorter time frames as they gain experience and if this suits their trading style and favoured underlying assets. Even for very shortterm traders, however, it is sensible to check longerdated charts at least daily, if only to keep abreast of slowmoving trends and form a view on how they might affect shortterm price action.
Because binary options expire worthless if a certain scenario is not achieved within a specified time frame, they are extremely time sensitive. This means it is crucial to pick the right time frame and expiry so that trends have enough room to run.
If, for example, you correctly identify a downward trend and buy a put option, you could find your option expires out of the money if a retracement or correction to that trend occurs just before the contract runs out. In this scenario, you should have chosen an option with a longer time frame to allow the retracement to end and the trend to resume.
One way traders can allow themselves more room in such a scenario is by purchasing a roll over from their broker, if they offer this tool. A roll over allows you to extend the expiry time of your option if a price correction occurs and you think it will be shortlived.
One popular rule of thumb among binary options traders choosing expiry times is to go for one that is at least three times as long as the time frame of the strategy you have chosen. If, for example, the strategy you are following uses a fiveminute chart, choose an expiry time of at least 15 minutes.
Also, try and gauge market volatility and momentum. If prices start to move very quickly after you received your trading signal, go for a shorter expiry time. If moves take a while to get going, opt for a longer expiry time.
Similarly, if market conditions are very volatile or choppy, use a shorter expiry time than you would in slow, ranging markets or periods of fairly smooth price action.
Summary
So far you have learned that:
 by analysing historic price movements on the charts you can draw conclusions about its future direction
 binary options traders use support & resistance, price patterns and indicators to predict price movements
 a good way to choose an asset is by checking how fast or slow it tends to move
 Binary option traders typically use moving average crossovers, the so called ‘123 pattern’ or Fibonacci retracements to determine market direction
 combining two or more tools such as Fibonacci retracements and stochastics can give you powerful trading signals
 binary option traders generally go for an expiry time that is at least 3 times longer than the time frame they take their signals from
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The Fibonacci Fans binary options trading strategy discussed here aims to spot opportunities to initiate Call or Put trades using and indicator that draws specialized lines that spread out like a fan when applied on a chart. These lines are not drawn randomly by the indicator, but are drawn based on specific calculated areas known as the Fibonacci numbers. To understand the strategy, we need to understand the indicator for this strategy.
Fibonacci Fans are also called Fibonacci Projections. The tool in question is found under the Fibonacci group of indicators. These are indicators that identify potential price retracement or reversal areas based on the Fibonacci numbers. These numbers are located at retracement levels that are at 23.6%, 38.2%, 50%, 61.8%. 78.6% and 100%.
The Fibonacci Fan Tool
The Fibonacci Fan tool is used to catch retracement entry points within the contect of a trend. The fan lines resemble a handheld fan which has been spread out, hence the name. The fan lines may either point upwards or downwards and the direction of the fan lines is a reflection of trend.
Chart Setup
In order to trade this strategy, the chart setup should be performed as follows:
 MetaTrader 4 Indicators: The MT4 tools used for this trade are the Fibonacci Fans tool and the Stochastics oscillator, set to 10,3,3.
 The time frame chart used in setting up this trade must be at least 4 hours. This is because long term charts are a better reflection of the trend than short term charts which are mostly market noise.
Indicator Settings
To activate the Fibonacci fan tool and use it to perform the chart trace, click on the Insert tab on the top navigation menu. Then select Fibonacci, and then the Fans tool. You can modify the properties of the indicator as you wish, while retaining the original Fibonacci fan line settings.
STRATEGY
The strategy is to locate a retracement from a major trend, and then to seek out areas where price action will continue in the direction of the original trend. The Fibonacci fan lines mark out the areas where the price retracements will come to an end.
Since there are 5 of such areas, how does the trader determine the exact one where this will happen? Another tool is introduced and this is the Stochastics oscillator. This indicator can detect overbought and oversold market conditions. When the lines of the Stochastics indicator cross at overbought or oversold levels when price is at a Fibonacci fan line, this is the definition of the area where retracement will end for continued price movement to occur. The trader can then decide to enter a Call option (oversold) or a Put option (overbought).
Rules for Choosing a Call Option
A Call option trade aims to capture the renewed upside move following a retracement of price action from an uptrend. Therefore, a trade entry for a Call option should be made when the following setup occurs:
a) Trace the Fibonacci fan tool from a swing low point (lowest price point on the chart) to a swing high (highest price point) on the chart. This traces the fan lines on the chart.
b) From an initial uptrend, the price retraces to a Fibonacci fan line. The price action candle in question must touch a fan line without the candle closing below that fan line.
c) The Stochastics oscillator lines cross at levels at nd candle.
For this chart, the time frame is 4 hours, therefore the trade exit should be set to 8 hours.
Rules for Choosing a Put Option
A Put option trade aims to capture the renewed downside move following a retracement of price action from a downtrend. Therefore, a trade entry for a Put option should be made when the following setup occurs:
 Trace the Fibonacci fan tool from a swing high (highest price point on the chart) to a swing low (lowest price point) on the chart. This traces the fan lines on the chart.
 From an initial downtrend, the price retraces upwards to a Fibonacci fan line. The price action candle in question must touch a fan line without the candle closing above that fan line.
 The Stochastics oscillator lines cross at levels at >75, which is classified as overbought when price is at a fan line.
 At the fan line in question, wait for the next candle to open and attempt to pull back up to the fan line in question. Once it touches the fan line, go to your binary options platform and purchase a PUT option.
The setup for the Put option is displayed on the chart below.
In this example, we can see that the retracement from the downtrend was to the 78.6% line, and since this was where the Stochastics was overbought, the Put trade is valid at this point.
Trade Expiry
For the daily chart, the trader has the option of selecting one or two candle lengths in determining the trade expiry. This is equivalent to an EndofDay expiry.
Disclaimer: “Your capital may be at risk. This material is not investment advice.”
How to use Fibonacci in trading
Trading based on the Fibonacci method is a unique way of analysing markets. The Fibonacci hypothesis that was developed by the famous mathematician, Leonardo de Pisa, has stood the test of time.
Even to this day, traders apply the concepts of Fibonacci and the golden ratio; represented by the number 1.618, in various forms of technical analysis. Fibonacci methods, however, are most commonly applied to identify support and resistance levels.
Traders use the Fibonacci numbers in order to estimate where prices might retrace or reverse by measuring the most recent leg of an uptrend or downtrend.
Fibonaccibased trading methods work due to the fact that they’re widely practiced. So, despite the mysticism attached to this form of technical analysis, it is, in fact, a selffulfilling prophecy. To put it in other words, given the widespread use of Fibonaccibased methods of analysis, traders tend to watch these levels and trade based on the Fibonacci levels, making them into forms of support and resistance that simply work.
Before we get into more detail on the subject of Fibonacci trading, a bit of history and context is required.
Where did the Fibonacci numbers come from?
It is said that in the year 1202, Leonardo de Pisa, or Leonardo Pisano, who was born in Pisa, discovered the Fibonacci sequence of numbers. Although the Fibonacci sequence is largely attributed to Leonardo, his knowledge came from his travels to the Far East. Having learned about the HinduArabic numeral system, Fibonacci documented his discovery in his famous work; “Liber Abaci”, which eventually led to his nickname as Fibonacci.
The works of Leonardo eventually gave way to the discovery of what is called “the golden ratio.”
The golden ratio has been proven to appear, not just in the financial world of trading, but in every aspect of life; from famous pieces of Ancient Greek architecture, to nature. The most famous example of the golden ratio is the nautilus shell. The golden ratio can be seen in the nautilus shell, which expands in a logarithmic spiral. By connecting the arcs with squares, or Fibonacci tiling, the sizes of the squares follow the Fibonacci sequence of numbers.
Understanding the Golden Ratio or Phi
The golden ratio, or phi, is the number 1.618. The inverse of this is 0.618. Phi (pronounced “fi” or “fy”) is the ratio of the length of one line segment to another, which results from dividing the original line at a certain point. For example, the distance from point A to point C in the line below is said to be 1.618 times that of the distance from point B to point C, and the distance from B to C is 0.618 times that of A to C. In mathematics, phi with an uppercase ‘P’ represents 1.618, while phi with a lowercase ‘p’ represents the inverse, which is 0.618.
The golden ratio occurs in the numerical series developed by Leonardo, also known as the Fibonacci sequence of numbers.
What is the Fibonacci sequence of numbers?
Leonardo described his sequence of numbers in the following way:
0,1,2,3,5,8,13,21,34,55,89,144,233 and so on.
The further you progress into the sequence; you will find that each number becomes 1.618 times greater than the preceding number. For example, when you divide 89 by 144, you get 0.618, but when you divide 89 by 55, you get 1.618; the golden ratio. This is similar to the illustration given in figure 1 with regards to points A and B in relation to point C.
Based on the Fibonacci sequence, we now know two main ratios; phi, which is 1.618 and its inverse; 0.618. Aside from the above, other ratios include 0.382. This ratio is formed when you take a number and divide it by the number two places to the right.
Thus, 89/244 = 0.3819 or 0.382 when rounded to 3 decimal places. Further variations also derive other ratios such as 0.236, which is derived from taking a number and dividing it by the number four places to the right. In the world of technical analysis, the following ratios are the most important: 0.236, 0.382, 0.618, and 1.618. Of course, you can find many other ratios, but the above four are the most important.
How to use Fibonacci ratios in Forex trading
Traders know that prices never rise in a straight line. Prices tend to rally or decline, then retrace, and then continue in the direction of the previous trend. By using Fibonacci ratios, you can measure a wave (a rally or a decline) and then anticipate where the price might retrace when it pulls back.
The Fibonacci ratios are the key levels where you can expect the price to retrace. Thus, Fibonacci ratios are nothing more than support and resistance levels. They work because these levels are watched by a large number of traders.
Fibonacci levels can be combined with any trading strategy. For example, if you use a moving average, you can apply Fibonacci levels to measure the length of a rally and then wait for the moving averages to confirm the bullish or bearish trend when the price makes a pullback.
Of course, using Fibonacci levels requires a bit of discretion. For example, the points you choose to measure the Fibonacci level can vary from one trader to another. Likewise, some traders use only the opening and closing prices, while others use the high and low prices.
Remember that Fibonacci levels are an exact science.
The Fibonacci retracement tool – MT4
The MetaTrader 4 (MT4) trading platform, as well as just about any other trading or charting platform, has the Fibonacci measurement tool. You can access this from MT4’s main menu: Insert > Fibonacci > Retracement.
There are many other Fibonacci tools; such as the Fibonacci spiral, Fibonacci arcs, and so on. But among all these tools, the retracement tool is the most widely used. In MT4 and most other charting platforms, you can also adjust the levels.
In this example, we only apply 0.618, 1.618 (which is the extension), and 0.382. You can adjust further values by doubleclicking on the Fibonacci tool and entering the values yourself. An example of this is shown in figure 2 below.
How to draw Fibonacci levels
The first step is to identify a strong movement in the market. This could be a strong rally or a strong decline. Now, starting in the opposite direction to this strong movement, click on the starting point of this rally (could be a high or low) and drag the Fibonacci tool to the end point.
A quick way to see if you’ve plotted the Fibonacci tool correctly is to simply look at the 0 and 100 values. When the Fibonacci levels are plotted, you’ll see the retracement level 0.382 followed by 0.618.
Figure 3 illustrates an example of how to draw the Fibonacci tool.
How to trade with Fibonacci levels
Now that the Fibonacci levels are in place, the next step is to expect a reversal either at the 0.618 or 0.382 Fibonacci ratio levels. These are nothing but supports and resistances. In an uptrend, when you measure the Fibonacci ratios (as shown in figure 3 for example), the 0.618 and 0.382 (and other Fibonacci ratios) are potential support levels.
Conversely, when you measure a downtrend using Fibonacci ratios, the levels of 0.618, 0.382 etc. become potential resistance levels.
Depending on the price action at these levels (or based on signals from other technical indicators) you can expect prices to reverse (or in some cases break these levels and change direction).
In most cases, when the price retraces to 0.618 or 0.382, you can expect it to then rally towards 1.618, which is known as the Fibonacci extension level.
This principle is widely used as a trading strategy in itself as traders typically buy or sell near the Fibonacci retracement level and take profit near the Fibonacci extension level.
In the above example in figure 3, a long position would have been opened at either 0.382 or 0.618 (deep or shallow retracement) with a Take Profit set at the 1.618 extension level.
Some traders also make use of the 50% retracement level, while others prefer to round off the Fibonacci ratios to 0.40%, 0.62% and so on. It doesn’t make much of a difference; just as one trader may use highs and lows while another trader might use the opening and closing prices.
Fibonacci ratios can be applied to any market and any timeframe as long as there is a strong movement in the market. One of the most important aspects of successful trading with Fibonacci levels is to have patience and wait for a pivot high and low to be formed.
Figure 4 shows the Fibonacci ratios applied to a daily chart for Cisco Systems (CSCO).
In the above example, you can see where the high and low points were taken from and the subsequent retracement to the 38.2% Fibonacci level.
Most traders tend to plot Fibonacci levels as the price evolves. However, a trader must wait for a few sessions until the retracement is in the early stages. Another important thing to bear in mind is that just because the price retraces to a Fibonacci level, there is no guarantee that the price will continue in the direction of the trend.
There are many instances when the price bounces off the 61.8% retracement but the subsequent rally fails, with the price eventually changing trend and thus, its direction.
In conclusion, Fibonacci ratios might seem mystical but they are nothing but support and resistance levels that are widely watched by traders. The popularity of Fibonacci levels makes them a selffulfilling prophecy; as large buy and sell orders are placed at these levels.
The fact that Fibonacci levels represent potential areas of support and resistance makes them a unique choice for trend traders.

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