Every transpacific exchange trader will use Fibonacci retracements at some point in their return career. Some will use it just some of the time, while others desire apply it regularly. But no matter how often you use this tool, what’s most substantial is you use it correctly each and every time.
Improperly applying technical judgement methods will lead to disastrous results, such as bad entry emphasizes and mounting losses on currency positions. Here we’ll examine how not to apply Fibonacci retracements to the extraneous exchange markets. Get to know these common mistakes and chances are you’ll be gifted to avoid making them—and suffering the consequences—in your trading.
1. Don’t Mix Fibonacci Insinuation Points
When fitting Fibonacci retracements to price action, it’s unendingly good to keep your reference points consistent. So, if you are referencing the weakest price of a trend through the close of a session or the body of the candle, the most high price should be available within the body of a candle at the top of a bend: candle body to candle body; wick to wick. (To learn uncountable, see: Candlestick Charting: What Is It?)
Incorrect analysis and mistakes are created post-haste the reference points are mixed—going from a candle wick to the assemblage of a candle. Let’s take a look at an example in the euro/Canadian dollar currency pair off. Figure 1 shows consistency. Fibonacci retracements are applied on a wick-to-wick heart, from a high of 1.3777 to the low of 1.3344. This creates a clear-cut freedom fighters level at 1.3511, which is tested, then broken.
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| Figure 1: A Fibonacci retracement rub in to price action in the euro/Canadian dollar currency pair. |
| Rise: FX Intellicharts |
Figure 2, on the other hand, shows inconsistency. Fibonacci retracements are beared from the high close of 1.3742 (35 pips below the wick intoxication). This causes the resistance level to cut through several candles (between February 3 and February 7), which is not a illustrious reference level.
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| Figure 2: A Fibonacci retracement applied incorrectly. |
| Begetter: FX Intellicharts |
By keeping it consistent, support and resistance levels will appropriate for more apparent to the naked eye, speeding up analysis and leading to quicker professions. (For related reading, see: Retracement or Reversal: Know the Difference.)
2. Don’t Ignore Long-Term Tendencies
New traders often try to measure significant moves and pullbacks in the short in relation to without keeping the bigger picture in mind. This narrow attitude makes short-term trades more than a bit misguided. By keeping flags on the long-term trend, the trader is able to apply Fibonacci retracements in the natural direction of momentum and set themselves up for great opportunities.
In Figure 3, beneath, we establish the long-term trend in the British pound/New Zealand dollar currency unite is upward. We apply Fibonacci and see our first level of support is at 2.1015, or the 38.2% Fibonacci even from 2.0648 to 2.1235. This is a perfect spot to go long in the currency partner.
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| Figure 3: A Fibonacci retracement applied to the British pound/New Zealand dollar currency span establishes a long-term trend. |
| Source: FX Intellicharts |
But, if we take a look at the shortened term, the picture looks much different.
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| Figure 4: A Fibonacci retracement rub in on a short-term timeframe can give the trader a false impression. |
| Source: FX Intellicharts |
After a run-up in the currency team up, we can see a potential short opportunity in the five-minute timeframe (Figure 4). This is the adornments. By not keeping to the longer term view, the short seller applies Fibonacci from the 2.1215 pin high to the 2.1024 spike low (February 11), leading to a short situation at 2.1097, or the 38% Fibonacci level.
This short trade does net the salesperson a handsome 50-pip profit, but it comes at the expense of the following 400-pip increase. The better plan would have been to enter a long assertion in the GBP/NZD pair at the short-term support of 2.1050.
Keeping in mind the bigger picture will not contrariwise help you pick your trade opportunities, but will also abort the trade from fighting the trend. (For more, see: Forex Trading: Advantaging the Big Picture.)
3. Don’t Rely on Fibonacci Alone
Fibonacci can provide reliable have dealings setups, but not without confirmation.
Applying additional technical tools identical to MACD or stochastic oscillators will support the trade opportunity and enlargement the likelihood of a good trade. Without these methods to act as confirmation, a seller will be left with little more than hope for a sheer outcome. (For related reading, see: Exploring Oscillators and Indicators.)
In Figure 5, we see a retracement off a medium-term make higher in the euro/Japanese yen currency pair. Beginning on January 10, 2011, the EUR/JPY truck rate rose to a high of 113.94 over the course of almost two weeks. Utilizing our Fibonacci retracement sequence, we arrive at a 38.2% retracement level of 111.42 (from the 113.94 top). Succeeding the retracement lower, we notice the stochastic oscillator is also confirming the inertia lower.
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| Figure 5: The stochastic oscillator confirms a trend in the EUR/JPY in holy matrimony. |
| Source: FX Intellicharts |
Now the opportunity comes alive as the price action examinations our Fibonacci retracement level at 111.40 on January 30. Seeing this as an opening to go long, we confirm the price point with stochastic, which manifests an oversold signal. A trader taking this position would experience profited by almost 1.4%, or 160 pips, as the price bounced off the 111.40 and traded as tall as 113 over the next couple of days.
4. Don’t Use Fibonacci Over Dwarfish Intervals.
Day trading the foreign exchange market is exciting, but there is a lot of volatility.
For this grounds, applying Fibonacci retracements over a short timeframe is ineffective. The tiny the timeframe, the less reliable the retracements levels. Volatility can, and will, skew upkeep and resistance levels, making it very difficult for the trader to really pick and on what levels can be traded. Not to mention in the short term, spikes and whipsaws are definitely common. These dynamics can make it especially difficult to place tarries or take profit points as retracements can create narrow and tight confluences. Unprejudiced check out the Canadian dollar/Japanese yen example below.
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| Figure 6: Fibonacci is concentrated to an intraday move in the CAD/JPY pair over a three-minute time frame. |
| Rise: FX Intellicharts |
In Figure 6, we attempt to apply Fibonacci to an intraday actuate in the CAD/JPY exchange rate chart (over a three-minute timeframe). Here, volatility is costly. This causes longer wicks in the price action, creating the latent for misanalysis of certain support levels. It also doesn’t help that our Fibonacci opens are separated by a mere six pips on average, increasing the likelihood of being obstructed out.
Remember, as with any other statistical study, the more data occupied, the stronger the analysis. Sticking to longer timeframes when applying Fibonacci progressions can improve the reliability of each price level.
The Bottom Line
As with any specialty, it let ins time and practice to become better at using Fibonacci retracements in forex career. Don’t allow yourself to become frustrated—the long-term rewards definitely outbalance the costs. Follow the simple rules of applying Fibonacci retracements and learn from these workaday mistakes to help you analyze profitable opportunities in the currency markets.
(For numberless, see: Fibonacci and the Golden Ratio.)