Let’s look at a case when the Fibonacci retracement tool fails.
The GBP/USD 4-hour chart is shown below.
You notice that the pair is in a downturn, so you pull out your Fibonacci retracement tool to help you find a decent entry position. The swing high is 1.5383, while the swing low is 1.4799.
You can see that the pair has been stalling at 50.0% for the last several candles.
You can see that the pair has been stalling at 50.0% for the last several candles.
“Oh man, that 50.0% Fib level!” you think to yourself. It’s holding the child! It’s time to short this sucka!”
You short the market and fantasize about driving down Rodeo Drive in your new Maserati with Scarlett Johansson (or, if you’re a girl trader, Ryan Gosling) in the passenger seat…
Now, if you actually placed an order at that level, not only would your fantasies be dashed, but your account would suffer severely if you didn’t manage your risk appropriately!
Examine what happened.
The Swing Low turned out to be the bottom of the downtrend, and the price proceeded to rise above the Swing High point.
What is the takeaway here?
While Fibonacci retracement levels increase your chances of success, they, like other technical tools, do not always work. You have no idea whether the price would reverse to the 38.2% mark before resuming its trend.
It may occasionally reach 50.0% or 61.8% before turning back. HeOccasionally,he price will simply disregard Mr. Fibonacci and blast past all the levels, much like LeBron James bullies his way into the lane with pure might.
Remember that the market will not always resume its uptrend after encountering temporary support or resistance, but will instead continue to move beyond the most recent Swing High or Low.
Another major issue when employing the Fibonacci retracement tool is deciding which Swing Low and Swing High to employ.
People look at charts in different ways, at different time frames, and with different fundamental biases. Stephen from Pipbuktu and the girl from Pipanema are likely to have different ideas about where the Swing High and Swing Low points should be.
The main line is that there is no definitive right or wrong way to accomplish it, especially when the trend on the chart is obscured. It can sometimes become a guessing game.
That is why you should refine your skills and use the Fibonacci retracement tool with other tools in your forex toolbox to increase your chances of success.
