Fibonacci retracement is a technical analysis strategy that traders use to determine resistance and support levels. This strategy relies on the concept that markets will recall a predictable section of a move before they can proceed in the initial direction. There are some mistakes you should avoid when using Fibonacci retracements as we shall see in this article.
Fibonacci Retracement in technical Trading
Many technical traders use Fibonacci retracements to determine strategic areas for stop losses, transactions, or target prices to help them enter at a better rate. Many indicators incorporate the retracement approach like Elliott Wave theory, Gartley patterns, and Tirone levels.
After notable price movement, the new resistance and support levels often lie along the retracement levels. Fibonacci retracement levels are fixed prices that never change. This feature facilitates simple and quick identification while allowing investors and traders to react once the price levels are evaluated. Seeing that these levels are inflection spots, traders anticipate some kind of price movement, which can be a rejection or a break.
Mistakes you Should Avoid when Using Fibonacci Retracement Levels
At some point, foreign exchange traders use Fibonacci retracement levels in their trading venture. While some use it for a limited time, others will use it regularly. Regardless of how frequently you use this tool, you want to use it correctly. Using technical analysis in the wrong way can result in tragic results like setting up losses on currency spots or poor entry points. Let’s discuss common chances and mistakes to avoid when using this technical analysis strategy.
· Avoid Mixing Reference Points
When placing Fibonacci retracements to price movement, you want to maintain consistency on your reference points. In this case, if you are quoting the lowest trend price via the candle body or close of the session, the high rate should lie within the candle’s body at the peak of a trend. That is: wick to wick and candle body to candle body. Mistakes and improper evaluation are triggered once the quotation spots are integrated, moving from a candle body to a candle wick.
· Watch out for Long term Trends
Often, new traders analyze significant pullbacks and moves in the short term without considering the bigger picture. Such a narrow perception makes short term trades overly misguided. By monitoring the long term trend, traders can execute Fibonacci retracements in the right momentum direction and prepare themselves for big opportunities.
· Avoid Depending on Fibonacci Tools Only
Fibonacci can offer dependable trade configurations, but traders still need to make confirmation. Adopting other technical tools such as Stochastic oscillators or moving average convergence divergence enhances the trade opportunity. It also increases the probability of a proper trade. Failure to use these methods for confirmation leaves traders with little chance for positive results.
· Framing Fibonacci Retracements for a Short Term Period
This is one of the biggest mistakes that traders make when using Fibonacci retracements. Short-term periods in forex like 1-hour time frame are overly short and ineffective for determining a currency trend. What the trader thinks is a robust downtrend on a short-term chart could be a daily chart retracement.
Attempting to frame a Fibonacci retracement tool for a short term period is a recipe for disaster. The currencies trend pattern on long term periods like the daily chart is often better at determining the trend. The best thing traders can do here would be to utilize a long time to establish the trend, administer the tool, and then change to the short term period to make an early determination.
· Applying Fibonacci Retracements in a Non-trending Market
Fibonacci retracement relies on price swings, or currency pairs’ ups and downs. As a result, using this strategy when the charts are flat is not useful. If you prefer trading consistently on two or one currency pair only, check the options that have a nearly constantly moving chart.
Commodity pairs would work well too. Highly volatile major pairs such as the USD/EUR would be ideal when trending. However, this pair can be unpredictable. Volatile prices and changes in the USD/EUR or JPY/USD can go flat for more than a day, especially when there is no major news.
Practicing and enhancing your Fibonacci retracement skills in forex trading takes time. Avoid getting frustrated because the long-term benefits outweigh the costs. Adopt and follow the simple Fibonacci retracements and learn on the go. Doing so helps you assess productive opportunities in currency markets.