All forex traders at some point in their trading career will use Fibonacci retracements. Some traders will use it irregularly, while some may opt to use it regularly. It does not matter how often a trader uses this tool, but the most crucial aspect is using it properly if and when you use it.
Improper application of technical analysis tools leads to losses incurred on currency positions and bad entry points. Fibonacci retracements are mostly used as a strategy in trend-trading. Here, traders are aware of a retracement in a trend and attempt to make low-risk entries in the initial trend’s direction, using Fibonacci levels.
A trader who uses this strategy can anticipate a price’s high possibility of jumping from the Fibonacci levels towards the initial trend’s direction.
Here is how to avoid making the top mistakes in Fibonacci retracements.
1. Do not Mix Reference Points
When you are matching Fibonacci retracements to price actions, always be consistent in your reference points. If your reference is the lowest trend price via a session close or candle body, the most suitable high price should be found within the candle body at the trend’s top or candle body to candle body and wick to wick.
An incorrect analysis and errors happen when you mix the reference points such as going from the wick to the candle body.
2. Do not Neglect Long-Term Trends
Newbies in trade often attempt to measure large moves and pullbacks without thinking of the long-term This is a narrow outlook that makes short-term trades very misguided. By monitoring the long-term trends, you can use Fibonacci retracements in the proper momentum direction, and lead themselves to better and more profitable opportunities.
In forex trading, the activity in short timeframes such as 15-minutes or even 1-hour period is too short for a trader to determine a currency’s trend. What a trader might view as a strong and stable downtrend on a one- or four-hour chart is probably a retracement when looked at in a daily chart, and plotting a Fibonacci retracement tool may be a disaster in waiting.
The currency trend plans on a longer timeframe like a daily chart make it easier to determine a trend. The best approach is to make use of the long timeframe for determining the trend, use the tool, and turn to the shorter timeframe to determine your entry.
3. Do not Rely on Fibonacci Only
The Fibonacci retracements provide traders with steady trade setups, but with a confirmation. The application of more technical analysis tools such as stochastic or MACD oscillators supports and boosts your trade to become profitable. Without using these techniques to help in confirmation, you will have a hard time getting a positive result.
A forex entry is done best by making use of two or three supplementing indicators. For instance, if a currency pair is going through a downward retracement after a strong uptrend, the retracement will most likely stop at one of at least five retracement levels- 23.8%, 38.2%, 50%, 61.8%, or 100%. Here, you need to use other indicators such as the RSI, MACD, or stochastics for help.
4. Do not Rely on Fibonacci Retracement for Day Trading
Day trading in forex is very exciting but full of volatility, which makes using Fibonacci retracements over the short-term very ineffective. The shorter the time, the less the retracement levels stay reliable. Volatility alters the support and resistance levels, making it hard for traders to pick the trade levels. A
In the short timeframe, whipsaws and spikes are a common occurrence. These aspects can make it very difficult for traders to take profit points or place stops because retracements create tight and narrow confluences.
The levels in Fibonacci retracements often show reversal points with accuracy. They are not as easy to trade, and the levels are better when used as a tool in a larger strategy. In theory, this strategy searches for confluences in several indicators to pinpoint reversal areas that offer a high-potential reward but low-risk trade entries.
Fibonacci retracement becomes very powerful if used alongside various technical signals and indicators. Many traders have had success with Fibonacci retracements and ratios for placing transactions in long-term price trends.