Dome – forecasting options trading system based on Fibonacci levels

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«Dome» – forecasting options trading system based on Fibonacci levels

Trading tactics of binary options called «Dome»

Professional traders very often use combined techniques to predict the market in technical analysis. This allows them to maximize their financial performance in the binary market. Today we offer one of the simple examples of market forecasting systems – “Dome”. The work of Dome is based on the use of the Fibonacci graphical arc and the classical oscillator MACD indicator. This technical approach to generating signals allows us to accurately determine the market’s reversal trends and leads to a high and stable dynamics of capital increase.

Trading system «Dome»: technical requirements

The system requirements of the “Dome” strategy must be considered through the prism of the trading terminal for trading options. Therefore, immediately outline the range of necessary services and parameters of the platform that we need to operate the trading system:

– availability of a special service for constructing the Fibonacci arc;

– the possibility of applying indicator tools to the working schedule;

– Graph with variable timeframe;

– availability of turbooptions on the terminal;

– expiration period from 60 seconds;

– maximum payments on options;

– Good selection of assets;

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– The minimum threshold for entry into trade.

As an example of a service with such capabilities, we offer a platform from a licensed Binomo broker. The terminal of this company has professional equipment and provides the most optimal financial conditions for working in the option market – the minimum starting capital is $ 10, the option amount is from $ 1.

Trading system tools

So, we came to the technical side of the system. To mark the graph and apply this approach, set the following technical set of analysis tools on the quotation chart:

– The Fibonacci Arc. These are classical levels calculated by a special algorithm, but not linearly constructed, but in the form of arcs that outline possible ranges of fluctuations in quotations. The use of arcs allows us to identify more dynamic market movements, which leads to better forecasting efficiency. To build the necessary layout, open the Binomo terminal’s graphical tools service, select the Fibonacci tool in the Arc mode, and connect local extremes of the market with it;

– MACD indicator with standard format settings. This technical service will be used as a means of confirming the spread of quotations, which will maximize the effectiveness level of the strategy signals.

All the specified set of services is set to the timeframe of the working schedule 30 seconds. After configuring the workspace of the terminal, you get the following markup:

Dome market forecasting system: trading rules

To open the PUT trade, it is necessary to wait for the moment when the quotes of the asset after reaching one of the Fibonacci arcs will turn to decrease, and the MACD indicator will form the divergence of the oscillator lines down:

To open the CALL trade, it is necessary to wait for the moment when the quotes of the asset after reaching one of the Fibonacci arcs will turn to growth, and the MACD indicator will form the divergence of the oscillator lines up:

Expiration

Taking into account the periodicity of the frame of the trading quotes schedule, the optimal time period for expiration of options in this case will be a period of 120-180 seconds. Such a narrow trading range allows you to accurately fulfill the forecasts of the system and leads to a quick result.

Risk management

In fact, the system offers investors to work in the mode of trading scalping, which is characterized by the greatest risks. For this reason, we propose to use options with initial value or trades to reduce losses, the risk level of which does not exceed 3% of the invested amount.

“General Risk Warning: Binary options trading carry a high level of risk and can result in the loss of all your funds.”

The “Roof” strategy of trading on the futures market

During the quote building of any asset, the market forms cyclical extremes (minimums and maximums of the price). These points provide an excellent signal for the registration of trades. This format of forecasting has an average likelihood of confirmation at a level of more than 87%. Taking into account these factors, a highly effective trading strategy can be built on this. The only condition is to learn how to correctly determine these extremes and the probability of quote reversal from those price levels. There are many different tools for this, the most effective of them is the Fibonacci Levels, a semi-automatic chart tool. The “Roof” trading strategy is based precisely on this pattern of market fluctuations and this analysis tool.

The “Roof” trading strategy – setting up the chart

So, the main tool for generating signals on this strategy is the Fibonacci Levels, which, thanks to mathematical laws and a special algorithm, can determine the levels of market extremes. To do the markup of the trading chart, you will need to use the Fibonacci Levels chart service, which is available on professional trading platforms. The extremes can be built with the help of this chart service by combining the most recent local minima in the market history with the market maxima. To increase the effectiveness of the trading signals and market forecasts, we will apply a signal filter in the form of an Alligator indicator with the following building parameters: 6/3/1 standard shifts.

As a result, the trading chart will show the levels of market extremes and it now has a technical filter. Together it looks like this:

It is worth noting that the operator, besides having the tools we need, also offers high-quality services and minimal trading conditions. Here is the basic list of technical tools and trading parameters on their platform:

  • A set of chart tools
  • An indicator set
  • More than 80 assets for trading
  • Contracts with payouts of up to 90%
  • High-speed trading
  • Terms of trading – the initial deposit is 10 USD, the minimum trade amount is 1 USD
  • Monetization of profits in 24 hours

The “Roof” strategy – trading signals

We open trades UP on the futures market under the following conditions:

  • As a result of fluctuations, the price reaches one of the Fibonacci levels and rebounds off of it (thus, quote reversal points are built at the market extremum)
  • The Alligator indicator movings reverse upwards

We open trades DOWN on the futures market under the following conditions:

  • As a result of fluctuations, the price reaches one of the Fibonacci levels and rebounds off of it (thus, quote reversal points are built at the market extremum)
  • The Alligator indicator movings reverse downwards

Expiration and money management

The “Roof” trading strategy shows optimal results when using trades with an expiration period of 120-180 seconds. Such a short period for the trade is determined by the speed of building of the trading chart, as well as the volatility of the trading instruments.

On the matter of money management, it is necessary to use the classic parameters of trading risk limitation with the following values:

  • To work with minimal amounts of trading funds, we use trades of the starting price
  • When trading with large volumes of trading funds, the price level of contracts should be limited to 3% of the amount of capital.

“General Risk Warning: Binary options and cryptocurrency trading carry a high level of risk and can result in the loss of all your funds.”

Strategies for Trading Fibonacci Retracements

Leonardo Pisano, nicknamed Fibonacci, was an Italian mathematician born in Pisa in the year 1170. His father Guglielmo Bonaccio worked at a trading post in Bugia, now called Béjaïa, a Mediterranean port in northeastern Algeria. As a young man, Fibonacci studied mathematics in Bugia, and during his extensive travels, he learned about the advantages of the Hindu-Arabic numeral system. 

In 1202, after returning to Italy, Fibonacci documented what he had learned in the “Liber Abaci” (“Book of Abacus). In the “Liber Abaci,” Fibonacci described the numerical series that is now named after him. In the Fibonacci sequence of numbers, after 0 and 1, each number is the sum of the two prior numbers. Hence, the sequence is as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610 and so on, extending to infinity. Each number is approximately 1.618 times greater than the preceding number. 

Key Takeaways

  • In the Fibonacci sequence of numbers, after 0 and 1, each number is the sum of the two prior numbers.
  • In the context of trading, the numbers used in Fibonacci retracements are not numbers in Fibonacci’s sequence; instead, they are derived from mathematical relationships between numbers in the sequence.
  • Fibonacci retracement levels are depicted by taking high and low points on a chart and marking the key Fibonacci ratios horizontally to produce a grid; these horizontal lines are used to identify possible price reversal points.

This value–1.618–is called Phi or the Golden Ratio. The inverse of 1.618 is 0.618. The Golden Ratio mysteriously appears frequently in the natural world, architecture, fine art, and biology. For example, the ratio has been observed in the Parthenon, in Leonardo da Vinci’s painting the Mona Lisa, sunflowers, rose petals, mollusk shells, tree branches, human faces, ancient Greek vases, and even the spiral galaxies of outer space.

Fibonacci Levels Used in the Financial Markets

In the context of trading, the numbers used in Fibonacci retracements are not numbers in Fibonacci’s sequence; instead, they are derived from mathematical relationships between numbers in the sequence. The basis of the “golden” Fibonacci ratio of 61.8% comes from dividing a number in the Fibonacci series by the number that follows it.

For example, 89/144 = 0.6180. The 38.2% ratio is derived from dividing a number in the Fibonacci series by the number two places to the right. For example: 89/233 = 0.3819. The 23.6% ratio is derived from dividing a number in the Fibonacci series by the number three places to the right. For example: 89/377 = 0.2360.

Fibonacci retracement levels are depicted by taking high and low points on a chart and marking the key Fibonacci ratios of 23.6%, 38.2%, and 61.8% horizontally to produce a grid. These horizontal lines are used to identify possible price reversal points. 

The 50% retracement level is normally included in the grid of Fibonacci levels that can be drawn using charting software. While the 50% retracement level is not based on a Fibonacci number, it is widely viewed as an important potential reversal level, notably recognized in Dow Theory and also in the work of W.D. Gann. 

Fibonacci Retracement Levels as Trading Strategy

Fibonacci retracements are often used as part of a trend-trading strategy. In this scenario, traders observe a retracement taking place within a trend and try to make low-risk entries in the direction of the initial trend using Fibonacci levels. Traders using this strategy anticipate that a price has a high probability of bouncing from the Fibonacci levels back in the direction of the initial trend.

For example, on the EUR/USD daily chart below, we can see that a major downtrend began in May 2020 (point A). The price then bottomed in June (point B) and retraced upward to approximately the 38.2% Fibonacci retracement level of the down move (point C).

Figure 1: EUR/USD Daily Chart Fibonacci retracement. Chart Courtesy of TradingView.

In this case, the 38.2% level would have been an excellent place to enter a short position in order to capitalize on the continuation of the downtrend that started in May. There is no doubt that many traders were also watching the 50% retracement level and the 61.8% retracement level, but in this case, the market was not bullish enough to reach those points. Instead, EUR/USD turned lower, resuming the downtrend movement and taking out the prior low in a fairly fluid movement.

The likelihood of a reversal increases if there is a confluence of technical signals when the price reaches a Fibonacci level. Other popular technical indicators that are used in conjunction with Fibonacci levels include candlestick patterns, trendlines, volume, momentum oscillators, and moving averages. A greater number of confirming indicators in play equates to a more robust reversal signal.

Fibonacci retracements are used on a variety of financial instruments, including stocks, commodities, and foreign currency exchanges. They are also used on multiple timeframes. However, as with other technical indicators, the predictive value is proportional to the time frame used, with greater weight given to longer timeframes. For example, a 38.2% retracement on a weekly chart is a far more important technical level than a 38.2% retracement on a five-minute chart.

Using Fibonacci Extensions

While Fibonacci retracement levels can be used to forecast potential areas of support or resistance where traders can enter the market in hopes of catching the resumption of an initial trend, Fibonacci extensions can complement this strategy by giving traders Fibonacci-based profit targets. Fibonacci extensions consist of levels drawn beyond the standard 100% level and can be used by traders to project areas that make good potential exits for their trades in the direction of the trend. The major Fibonacci extension levels are 161.8%, 261.8% and 423.6%.

Let’s take a look at an example here, using the same EUR/USD daily chart:

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