Trend line analysis is another useful technique to use in conjunction with the Fibonacci retracement tool.
After all, Fibonacci retracement levels are most effective when the market is moving, so this makes sense!
Keep in mind that if a pair is in a downtrend or an upswing, traders employ Fibonacci retracement levels to get in on the action.
So why not seek for areas where Fib levels coincide with the trend?
A 1-hour chart of the AUD/JPY is shown below. As can be seen, the price has been following a short-term climbing trend line for the last few days.
“Hmm, that’s a nice uptrend right there,” you think. I’d want to buy AUD/JPY, even if only for a short-term trade. “I suppose I’ll buy when the pair returns to the trend line.”
But first, why not reach for your forex toolkit and pull out that Fibonacci retracement tool? Let’s see if we can acquire a more precise starting price.
We used the Swing low at 82.61 and the Swing high at 83.84 to plot the Fibonacci retracement levels.
Take note of how the rising trend line intersects the 50.0% and 61.8% Fib levels.
Could these levels serve as potential levels of support? There can only be one answer!
The presence of both a diagonal and a horizontal support or resistance level may indicate that other traders are also interested in those levels.
However, as with other drawing tools, creating trend lines can be somewhat subjective.
You don’t know how other traders are drawing them, but one thing is certain: there is a trend!
If you notice an uptrend building, you should look for strategies to go long to increase your chances of a good transaction.
The Fibonacci retracement tool can assist you in locating probable entry points.