The most important Fibonacci retracement level is the golden ratio, the 61.8%, but there is not the only one to be considered when trading. There are other theories out there that deal with Fibonacci retracement levels, and the most famous ones are Elliott and Gartley.
According to the Gartley approach, the 80% retracement of a move is mandatory if one is too short the move. That means that if you have a bearish trend that looks like the beginning of a new trend, then you should wait for the 80% retracement until deciding to short the pair and the stop loss should be above the highs where the bearish move started. That is if you trade the regular spot market of course.
But if one is trading binary options, the retracement level should be the same, and the direction to be traded should be the same as well: buying put options when the market is reaching the 80% retracement is the right thing to do and the expiration date is to be set depending on the time frame the analysis is being made.
It is said that 3 out of 4 times such an approach will turn out to be profitable and this means quite a nice ratio for binary trading. In the case of Elliott, 80% retracement is possible only in corrective waves and the first thing to come to mind when you meet such a retracement level is to look for a flat, a common one or an irregular.
It is said that Fibonacci without Elliott waves means nothing in trading but I would say that the other way around it is more valid: there is no Elliott Waves Theory if one is not looking at the patterns Elliott described with a Fibonacci tool. The Fibonacci numbers are all over the place and it is only normal that the technical analysis field is using the numbers.
80% Fibonacci Retracement Level
The 80% retracement level is not that well known or important as, say, the golden ratio, the now famous 61.8%, but I would say it is a pretty rewarding one. According to the Elliott Waves Theory, when the market is traveling after an impulsive move, it makes a corrective wave, a so-called wave a. This being the case, this wave a, depending on the pattern and structure of it, it is followed by another corrective wave, wave b.
But nature and levels for the b wave retracement are highly correlated with the structure of wave a and this gives us the levels the market is going to retrace. For binary options traders, this is the striking price, and for FX traders, this is the entry level.
Determining the Nature of the Wave
If the previous impulsive move prior to wave a was a five wave structure to the upside, or bullish, then the nature of wave a was bearish of course. It means wave b is actually correcting in the same direction as the one the impulsive move was traveling, so the binary options trader should look to buy a put option. But from what level?
Taking into account the fact that the structure of wave a is a corrective one, the minimum distance to be traveled for the b wave is 61.8% so that would be the level for the first put option.
If, for example, wave a is a double combination (meaning it is formed out of two simple corrective waves connected by an x wave, or an intervening/connecting wave), then the maximum retracement level for wave b is 80%.
This brings us to a strategy called scaling and scaling into a position is key. In binary options trading, this can be done by splitting the amount to be invested into different parts and trading options in the same direction but with different striking prices.
The thing to do is to split the distance between the 61.8% level and the 80% level into, say, 4 different striking prices and options and wait for market to reach those areas for the put options to be traded.
One has to take into account the fact that if the b wave is retracing around 80% of the previous wave then the two waves, a and b, are almost identical, so there is little room error. This applies to FX trading as going short in our example with a stop loss at the highs of wave a is a good rr ratio.
In technical analysis, a truncated zigzag, for example, is always being followed by a minimum 80% retracement and this time the 80% Fibonacci level can be used as a target in FX trading or a level to be considered for buying options until market reaches it.
The expiration date should be according to the time frame the pattern is forming and the market is analyzed but the alternation of expiration dates should be taken into account as well.
Gartley and Elliott Waves theories are the ones that are using the most the 80% level and the two video recordings that are coming with this project are showing you how both of them are using the level and how to interpret market when 80% retracement level is coming.