How to Trade Forex: Combining Fibonacci Levels with Support and Resistance (Advanced)
As we said in the previous blog using Fibonacci levels can be very subjective. However, there are ways that you can help tilt the odds in your favour.
While the Fibonacci tool is extremely useful, it shouldn't be used all by itself. The Fibonacci tool is to spot potential support and resistance levels and then see if they line up with Fibonacci retracement levels. If Fibonacci levels are already support and resistance levels, and you combine them with other price areas that a lot of traders are watching, then the chances of price bouncing from those areas are much higher.
The image below is an example of how you can combine support and resistance levels with Fibonacci levels. Below is a daily chart of USD/CHF.
As you can, it's been on an uptrend recently. You decide that you want to get on this long USD/CHF. But the question is, "When do you enter?" You apply the Fibonacci tool, using the low 1.0132 on January 11th for the Swing Low and the high at 1.0899 on February 19th for the Swing High.
Now that that you have the framework to increase the probability of finding solid entry, we can answer the question "Where should you enter?"
You look back a little bit and you see that the 1.0510 price was good resistance level in the past and it just happens to line up with the 50.0% Fibonacci retracement level. Now that is broken, it could turn into support and be a good place to buy.
If you did set an order somewhere around the 50.0% Fibonacci level, you would be a pretty happy trader! There would have been some pretty tense moments, especially on the second test of the support level on April 1st. Price tried to pierce through the support level, but failed to close below it. Eventually, the pair broke past the Swing High and resumed its uptrend.
You can do the same setup on a downtrend as well. The points is you should look for price levels that seem to have been areas of interest in the past. If you think about it, there's a higher chance that price will bounce from these levels.
Combining Fibonacci with Support and Resistance Summary:
- Firstly, previous support levels would be good areas to buy or sell because other traders will also be eyeing these levels like a hawk.
- Secondly, since we know that a lot of traders also use the Fibonacci tool, they may be looking to jump in on these Fibonacci levels themselves.
- With traders looking at the same support and resistance levels, there is a good chance that there are a ton of orders at those price levels (view order types).
- While there is no guarantee that price will bounce from those levels, at least you can be more confident about your trade. After all, there is strength in numbers!
- Remember that trading is all about probabilities. If you stick to those high probability trades. then there is a better chance of coming out ahead in the long run.
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