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A well known “strategy” for assessing likely market moves when trading binary options (or indeed placing any kind of bet on currency or stock markets) is the use of so-called Fibonacci indicators to plot price retracements.

Simply put, a retracement is when a clearly established price movement up or down pulls back for a while before continuing its original trend (a “projection”). The key point is that a retracement is a temporary reversal rather than a full blown reversal as such.

What happens visually (see graph on next page) is that the general trend hits a point where the price “bounces” and retraces its steps before resuming its projection. For a downward movement the switch back up is termed a price support point (the price is temporarily propped up) and the equivalent switch back down is termed a resistance point (the price cannot break through a ceiling).

It’s quite common to see repeated attempts for the price to “test” these points of support/resistance before finally breaching. It is also common to observe that a previously breached resistance point becomes a new support, below which the price will no longer retrace in a rising market (obviously the reverse also holds true in falling markets).

Clearly, being able to spot price trends and tell the difference between retracements and reversals significantly improves your chances of calling the market correctly and profiting from trades based on these predictions.

Or put another way, might protect you from losing your shirt because you didn’t see what was coming.

If a price reverses it’s recent trend direction you need to know whether that reversal is going to continue and become the start of a new trend or fizzle out fairly quickly. Get it wrong and you could find yourself holding or buying into a losing position, or conversely staying or selling out of a winning position.

A regular trader (one who actually buys and sells at a given price rather than simply betting on the movement of the price) needs to carefully gauge whether to hold, buy or sell in response to a price movement.

He or she must factor in trading costs (which may totally negate any possible advantage) and lost opportunity.

If you sell rather than hold and a reversal in a bull market turns out to be a very temporary retracement then you will incur two sets of trading costs for having both sold and bought back in at less then optimal prices.

A binary options trader doesn’t have quite the same concerns, but nevertheless needs to correctly assess how things are moving so as to trade on both short and longer term price movements.

But enough already – how the fuck does Leonardo Pisano Bigollo a.k.a. Fibonacci fit into all this?

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