We are seeking for exhaustive candlesticks when we combine the Fibonacci retracement tool with candlestick patterns.
When buying or selling pressure is exhausted, it might provide you an indication of when prices may continue to trend.
ForexInvestIndo.com refers to them as “Fibonacci Candlesticks,” or “Fib Sticks” for short. Isn’t it catchy? Let’s look at an example to see what I mean.
The EUR/USD 1-hour chart is shown below.
The pair appears to have been in a downtrend over the last week, but the movement appears to have stalled for a moment.
Will there be an opportunity to profit from this downtrend? You understand what this means. It’s time to put the Fibonacci retracement tool to use!
As seen in the chart, we have set our Swing High at 1.3364 on March 3 and our Swing Low at 1.2523 on March 6.
Because it’s a Friday, you’ve decided to relax, take an early day off, and determine when you want to enter after the charts are updated following the weekend.
Whoa! When you opened your charts, you noticed that the EUR/USD had risen significantly from its Friday closing price.
While the 50.0% Fib level held for a short period of time, buyers eventually drove the pair higher. You decide to wait and see if the 61.8% Fib level remains.
After all, the previous candle was quite bullish! Who knows, the price might just keep rising!
Will you look at that? A long-legged doji has developed directly on the 61.8% Fibonacci retracement line.
If you paid attention, you’d see that this is a “exhaustive candle.”
Has buying pressure subsided? Is resistance at the Fibonacci retracement level holding?
It is possible. Other traders were undoubtedly looking at that Fib level as well.
Is it time to short? You can never be certain (which is why risk management is so crucial), but the possibility of a reversal appears to be quite high!
You could have made some major money if you had shorted shortly after the doji developed.
The price halted briefly after the doji before continuing to fall. Look at all of those red candles!
Buyers appear to have become fatigued, allowing sellers to re-enter the market and reclaim control.
The price eventually fell all the way back to the Swing Low. That was a 500-pip movement! That might have been your best deal of the year!
Searching for “Fib Sticks” might be extremely beneficial because they can indicate whether a Fibonacci retracement level will hold.
If the price appears to be stalling on a Fib level, it is likely that other traders have placed orders at that levels.
This would provide additional evidence that there is indeed some resistance or support at that price.
Another advantage of Fib Sticks is that no limit orders are required at the Fib levels.
You may be concerned about whether the support or resistance will hold because we are looking at a “zone” rather than precise levels.
This is when your candlestick formation knowledge will come in handy.
You might wait for a Fib Stick to form directly below or above a Fibonacci retracement level to confirm whether you should place an order.
If a Fib stick forms, you may simply enter a trade at the market price because you now have greater proof that the level will hold.