How to Trade Forex: When Fibonacci Fails (Advanced)

24
Oct

This weeks 'How to Trade Forex' blog continues on from last weeks' blog on Fibonacci Retracement.

We know that support and resistance levels eventually break (See blogs Support and Resistance and Was Support and Resistance Broken?) and seeing how Fibonacci levels are used to find support and resistance levels this also applies to Fibonacci.

Failing Fibonacci

Below is an example of when the Fibonacci tool fails.

Below is a 4-hour chart of GBP/USD. In the image below you can see that the pair has been in a downtrend, so you decided to take out your Fibonacci tool to help you spot a good entry point. You use the swing high at 1.5383, with a swing low at 1.4799.

You see that the pair has been stalling at the 0.50% level for the past couple of candles. You short at market and look forward to a nice run down the chart....

 

If you really did put an order at that level, your account would have taken a serious hit if you didn't risk size properly! This is what happened next:

 

 

It turns out that swing low was the bottom of the downtrend and market began to rally above the swing high point.

 Fibonacci Lessons Learnt?

While Fibonacci levels give you a higher probability of success, like other technical tools they don't always work. You don't know if price will revers to the 38.2% level before resuming the trend.

Sometimes it may hit 50.0% or the 61.8% levels before turning around. Sometimes price will just ignore Fibonacci and blow past all the levels. Remember, the market will not always resume its uptrend after finding temporary support or resistance, but instead continue to go past the recent swing high or low.

Another common problem when using the Fibonacci tool is determining which swing low and swing high to use. People look at charts differently, look at the different time frames, have their own fundamental biases and have different ideas of where swing high and swing low points should be.

When Fibonacci Fails Summary:

It is important to understand that there is no absolute right way to trade with the Fibonacci tool.
You must home in on your own skills and combine the Fibonacci tool with other tools in your Forex tool box to ensure you are more successful.
Ensure that you practise on a demo account first.
Forex Trading Floors offers one-to-one coaching on Fibonacci with our Trader Coach either in person or online. There is also a free online radio show for those who would like to join the trading community of trading floor which is live every Wednesday from 8am till 11am.

Please contact us via email or phone 01277 232223 for more details on either coaching or online membership.

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