Fibonacci Retracement: A Powerful Tool In Forex Mining – Every forex trader will use Fibonacci retracements at some point in their trading career. Some will only use them part of the time, while others will apply them regularly. But no matter how often you use this tool, the most important thing is that you use it correctly every time.
Improper application of technical analysis methods will lead to disastrous results, such as poor entry points and increasing losses on currency positions. Here we will examine how
Fibonacci Retracement: A Powerful Tool In Forex Mining
Apply Fibonacci corrections in foreign exchange markets. Familiarize yourself with these common mistakes, and chances are you’ll be able to avoid them—and suffer the consequences—in your trading.
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When adjusting Fibonacci steps to price action, it’s always good to keep your reference points consistent. So, if you refer to the low of the trend until the end of the session or the candle body, the best high price should be available inside the candle body at the top of the trend: candle body to candle body ; fuse to fuse.
Inaccurate analysis and errors occur when the reference points are mixed up — from the candle wick to the candle body. Let’s look at an example in the euro/Canadian dollar currency pair. The image below shows consistency. Fibonacci retracements are applied on a wick-by-wick basis, from a high of 1.3777 to a low of 1.3344. This creates a clear resistance level at 1.3511, which is tested and then broken.
Fibonacci retracement applied to price action in the Euro/Canadian dollar currency pair. Image by Sabrina Jiang © 2020
The bottom image, on the other hand, shows the inconsistency. Fibonacci retracements apply from the highest close of 1.3742 (35 pips below the top of the wick). This causes the resistance level to break through a few candles (between February 3rd and February 7th), which is not a great reference level.
Fibonacci Retracement Levels
By keeping it consistent, support and resistance levels will become more visible to the naked eye, speeding up analysis and leading to faster trades.
Fibonacci progressions are based on the so-called Fibonacci numbers introduced to the Western world by Leonardo of Pisa in 1202. Although named after an Italian, they were actually discovered by Indian mathematicians hundreds of years earlier. Their first known use was around 200 BC. of the poet Pingala, who used them to classify the meters of Sanskrit poetry. Another Indian mathematician, Virahanka, gave the formula for their calculation about 600 years before Fibonacci.
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 wrong. By following the long-term trend, the trader can apply Fibonacci steps in the correct direction of the swing and set himself up for great opportunities.
In the figure below, we determine that the long-term trend of the British pound/New Zealand dollar currency pair is up. We apply the Fibonacci level and see that our first support level is at 2.1015, or 38.2% of the Fibonacci level from 2.0648 to 2.1235. This is the perfect place for a long position in the currency pair.
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The Fibonacci retracement applied to the GBP/NZD currency pair establishes a long-term. Image by Sabrina Jiang © 2020
A Fibonacci retracement applied to a short-term time frame can give a trader the wrong impression. Image by Sabrina Jiang © 2020
Following the rise in the currency pair, we can see a potential short opportunity in the five-minute time frame (above). This is a trap. Not taking a longer-term view, the short seller applies the Fibonacci value of the 2.1215 high to the 2.1024 low (February 11), leading to a short position at 2.1097 or the 38% Fibonacci level. .
This short trade earns the trader a hefty profit of 50 pip, but comes at the expense of the next advance of 400 pip. A better plan would be to go long in the GBP/NZD pair at the short-term support of 2.1050.
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Keeping the big picture in mind will not only help you choose trade opportunities, but also prevent the trade from bucking the trend.
Applying additional technical tools like MACD or stochastic oscillators will support the trading opportunity and increase the probability of a good trade. Without these methods to serve as confirmation, the trader has little more than hope for a positive outcome.
In the figure below, we see the return of the medium-term growth of the euro/Japanese yen currency pair. Starting on January 10, 2011, the EUR/NZD exchange rate rose to an almost two-week high of 113.94. Applying our Fibonacci retracement sequence, we arrive at the 38.2% retracement level of 111.42 (from the 113.94 peak). After the lower retracement, we notice that the stochastic oscillator is also confirming the lower momentum.
Now that opportunity is coming to life as price action tests our Fibonacci retracement level at 111.40 on January 30th. Since we see this as an opportunity to sell long, we confirm the price point with stochastics, which shows an oversold signal. A trader taking this position would have profited by almost 1.4%, or 160 pips, as the price bounced back from 111.40 and traded as high as 113 over the next few days.
Fibonacci Retracement Trading Strategies
For this reason, applying Fibonacci retracements in a short time frame is ineffective. The shorter the time frame, the less reliable the return levels. Volatility can, and will, distort support and resistance levels, making it difficult for the trader to select tradeable levels. Not to mention in the short term, spikes and saws are very common. This dynamic can make it especially difficult to place stops or take profit points since retracements can create tight and tight openings. Just look at the Canadian Dollar/Japanese Yen example below.
Fibonacci is applied to the intraday movement of the CAD/JPY pair on a three-minute time frame. Image by Sabrina Jiang © 2020
In the image above, we are trying to apply an intraday Fibonacci move in the chart of the CAD/JPY exchange rate (using three minutes for each candle). Volatility is high here. This causes the price to move longer, creating the potential for the wrong analysis of certain support levels. It also doesn’t help that our Fibonacci levels are only six pips apart on average, increasing the likelihood that we will be stopped out.
Remember, as with any statistical study, the more data used, the more powerful the analysis. Sticking to longer timeframes when applying Fibonacci sequences can improve the reliability of each price level.
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Fibonacci analysis is useful for forex traders to identify hidden support and resistance levels. There are two ways of applying Fibonacci methods in the forex market: historical analysis and trade preparation. The first examines long-term trends in the forex market to identify levels that trigger major trend changes.
Another method is used to predict retracement levels or forex price recovery. In this case, traders will place a Fibonacci grid over a chart of recent short-term price action, marking different Fibonacci levels. They will then place additional gratings over increasingly shorter time intervals, looking for places where the harmonic levels converge. These price points can become turning points for price action.
As with other forms of technical analysis, long-term trends tend to be stronger than short-term trends. In other words, the support level on the weekly chart is usually more reliable than that on the daily chart.
Although Fibonacci retracements can sometimes be used to predict price movements, many traders find the calculations too complex and time-consuming to use. Another disadvantage is that the results are too difficult for most traders to easily understand. Some experts believe that Fibonacci levels have more to do with herd psychology than any inherent property of Fibonacci levels. As a result, traders should consider the possibility that the Fibonacci method is actually self-fulfilling.
Fibonacci Forex Trading
The most commonly used Fibonacci retracement levels are 23.6%, 38.2%, 61.8% and 78.6%. 50% is also a common retracement level, although it is not derived from Fibonacci numbers.
Some experts believe that Fibonacci retracements can predict about 70% of market movements, especially when predicting a specific price. However, some critics say these are psychological comfort levels rather than severe resistance levels.
As with any other specialty, it takes time and practice to become better at using Fibonacci retracements in Forex trading. Don’t let yourself become frustrated – the long-term rewards 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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