Every foreign exchange trader will use Fibonacci retracements at some point in their trading career. Some will use it just some of the time, while others will apply it regularly. But no matter how often you use this tool, what's most important is that you use it correctly each and every time. Improperly applying technical analysis methods will lead to disastrous results, such as bad entry points and mounting losses on currency positions.
Here we'll examine how not to apply Fibonacci retracements to the foreign exchange markets. Get to know these common mistakes and chances are you'll be able to avoid making them - and suffering the consequences - in your trading.
Don't mix Fibonacci reference points. When fitting Fibonacci retracements to price action , it's always good to keep your reference points consistent. So, if you are referencing the lowest price of a trend through the close of a session or the body of the candle , the best high price should be available within the body of a candle at the top of a trend: Learn more about candles in Candlestick Charting: Misanalysis and mistakes are created once the reference points are mixed - going from a candle wick to the body of a candle.
Figure 1 shows consistency. Fibonacci retracements are applied on a wick-to-wick basis, from a high of 1. This creates a clear-cut resistance level at 1.
Figure 2, on the other hand, shows inconsistency. Fibonacci retracements are applied from the high close of 1. This causes the resistance level to cut through several candles between February 3 and February 7 , which is not a great reference level. By keeping it consistent, support and resistance levels will become more apparent to the naked eye, speeding up analysis and leading to quicker trades. To read more about reading this indicator, see Retracement Or Reversal: Don't ignore long-term trends.
New traders often try to measure significant moves and pullbacks in the short term - without keeping the bigger picture in mind. This narrow perspective makes short-term trades more than a bit misguided.
By keeping tabs on the long-term trend, the trader is able to apply Fibonacci retracements in the correct direction of momentum and set themselves up for great opportunities. We apply Fibonacci to see that our first level of support is at 2.
This is a perfect spot to go long in the currency pair. After a run-up in the currency pair, we can see a potential short opportunity in the five-minute time frame Figure 4.
This is the trap. By not keeping to the longer term view, the short seller applies Fibonacci from the 2. This short trade does net the trader a handsome pip profit, but it comes at the expense of the pip advance that follows. Keeping in mind the bigger picture will not only help you pick your trade opportunities, but will also prevent the trade from fighting the trend.
For more on identifying long-term trends, see Forex Trading: Using The Big Picture. Don't rely on Fibonacci alone. Fibonacci can provide reliable trade setups, but not without confirmation. Applying additional technical tools like MACD or stochastic oscillators will support the trade opportunity and increase the likelihood of a good trade. Without these methods to act as confirmation, a trader will be left with little more than hope of a positive outcome.
For more information on oscillators, see our tutorial on Exploring Oscillators and Indicators. Applying our Fibonacci retracement sequence, we arrive at a Following the retracement lower, we notice that the stochastic oscillator is also confirming the momentum lower. Now the opportunity comes alive as the price action tests our Fibonacci retracement level at Seeing this as an opportunity to go long, we confirm the price point with stochastic - which shows an oversold signal.
A trader taking this position would have profited by almost 1. Don't use Fibonacci over short intervals. Day trading the foreign exchange market is exciting but there is a lot of volatility. For this reason, applying Fibonacci retracements over a short time frame is ineffective.
The shorter the time frame, the less reliable the retracements levels. Volatility can, and will, skew support and resistance levels, making it very difficult for the trader to really pick and choose what levels can be traded.
Not to mention the fact that in the short term, spikes and whipsaws are very common. These dynamics can make it especially difficult to place stops or take profit points as retracements can create narrow and tight confluences.
Here, volatility is high. This causes longer wicks in the price action, creating the potential for misanalysis of certain support levels. It also doesn't help that our Fibonacci levels are separated by a mere six pips on average - increasing the likelihood of being stopped out. Remember, as with any other statistical study, the more data that is used, the stronger the analysis. Sticking to longer time frames when applying Fibonacci sequences can improve the reliability of each price level.
The Bottom Line As with any specialty, it takes time and practice to become better at using Fibonacci retracements in forex trading.
Don't allow yourself to become frustrated; the long-term rewards definitely outweigh the costs. Follow the simple rules of applying Fibonacci retracements and learn from these common mistakes to help you analyze profitable opportunities in the currency markets.
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Become a day trader. Top 10 Forex Trading Rules Improperly applying technical analysis methods will lead to disastrous results, such as bad entry points and mounting losses on currency positions. FX Intellicharts Figure 2, on the other hand, shows inconsistency. A Fibonacci retracement applied incorrectly.
FX Intellicharts By keeping it consistent, support and resistance levels will become more apparent to the naked eye, speeding up analysis and leading to quicker trades.
FX Intellicharts But, if we take a look at the short term, the picture looks much different. A Fibonacci retracement applied on a short-term time frame can give the trader a false impression. FX Intellicharts After a run-up in the currency pair, we can see a potential short opportunity in the five-minute time frame Figure 4.
FX Intellicharts Now the opportunity comes alive as the price action tests our Fibonacci retracement level at A conflict of interest inherent in any relationship where one party is expected to act in another's best interests. Passive investing is an investment strategy that limits buying and selling actions. Passive investors will purchase investments How much a fixed asset is worth at the end of its lease, or at the end of its useful life. If you lease a car for three years, A target hash is a number that a hashed block header must be less than or equal to in order for a new block to be awarded.
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