Using Fibonacci levels, as we discussed in the previous session, can be quite subjective. However, there are several things you may do to improve your chances.
While the Fibonacci retracement tool is incredibly valuable, it should not be utilized in solitary.
Use the Fibonacci retracement tool in combination with other tools.
Let’s take what you’ve learnt so far and try to combine it to assist us find some excellent trade opportunities in this lesson.
Fibonacci Retracement + Support and Resistance
One of the most effective methods to use the Fibonacci retracement tool is to identify probable support and resistance levels and determine if they correspond to Fibonacci retracement levels.
If Fibonacci levels are already support and resistance levels, and you combine them with other price places that many other traders are following, the likelihood of price bouncing from those areas increases significantly.
Let’s look at an example of how support and resistance levels can be combined with Fibonacci levels. The USD/CHF daily chart is shown below.
As you can see, it has recently been on an upward trend. Take a look at all of those green candles!
You make the decision to join the long USD/CHF bandwagon.
“When do you enter?” is the query.
You pull out the Fibonacci retracement tool, setting the Swing Low at 1.0132 on January 11 and the Swing High at 1.0899 on February 19.
With all of those Fibonacci retracement levels, your chart looks fantastic.
We can answer the question “Where should you enter?” now that we have a framework to maximize our chances of finding a solid entry.
Looking back, you can see that the 1.0510 price was a good resistance level in the past, and it just so happens to coincide with the 50.0% Fibonacci retracement level.
Now that it’s broken, it may become a source of support and an excellent location to buy.
You’d be a happy camper if you set an order somewhere around the 50.0% Fib level!
There would have been some difficult moments, notably during the second support level test on April 1.
Price attempted to breach the support level but failed to close below it. The pair eventually broke through the Swing High and resumed its uptrend.
The identical arrangement can be used in a decline. The objective is to look for price levels that appear to have been of interest in the past.
If you think about it, the price is more likely to bounce from current levels.
Previous support and resistance levels are usually good places to purchase or sell since other traders will be watching them like hawks.
Second, given that many traders employ the Fibonacci retracement tool, they may be attempting to capitalize on these Fib levels as well.
There’s a significant likelihood that there are a lot of orders at those price levels because traders are looking at the same support and resistance levels.
While there is no certainty that the price will rebound from those levels, you can be more confident in your trade. After all, there’s power in numbers!
Always keep in mind that trading is all about probabilities.
Next Lesson: How to Use Fibonacci Retracement with Trend Lines