How to Trade Forex: Combining Fibonacci with Trend Lines
This week's Forex Trading Floors How to Trade follows on from last week's blog - Combining Fibonacci with Support and Resistance will be covering Combining Fibonacci with Trend lines.
Combining Fibonacci with Trend Lines
Another good tool to combine with the Fibonacci tool is trend line analysis. After all, Fibonacci levels work best when the market is trending, so this makes a lot of sense!
Remember that whenever a pair is in a downtrend or uptrend, traders use Fibonacci retracement levels as a way to get in on the trend. So why not look for levels where Fibonacci levels line up right smack with the trend?
Below is an example of a one-hour chart of AUD/JPY. As you can see, price has been respecting a short term rising trend line over the past couple of days.
You could find yourself thinking "That's a good uptrend right there. I want to buy AUD/JPY, even if it is just for a short term trade. I think I will buy once the pair hits the trend line again." Before you do that though, why don't you reach for your Forex toll box and get that Fibonacci tool out? Let's see if we can get a more exact entry price.
Here we plotted the Fibonacci retracement levels by using the Swing low at 82.61 and the Swing High at 83.84. Notice how the 50% and 61.8% Fibonacci levels are intersected by the rising trend line. Could these levels serve as potential support levels?
This shows that the 61.8%! Fibonacci level held, as price bounced there before heading back up. If you had set some orders at that level, you would have had a perfect entry! A couple hours after touching the trend line, price zoomed up, bursting through the Swing High.
As you can seem, it does pay to make use of the Fibonacci tool, even if you are planning to enter on a retest of the trend line. The combination of both a diagonal and a horizontal support resistance level could mean that other traders are eying those levels as well.
Take note though, as with other drawing tool, drawing trend lines can also get pretty subjective. You don't know exactly how other traders are drawing them, but you can count on one thing - that there's a trend!
If you see that a trend is developing, you should be looking for ways to go long to give you a better chance of profitable trade. You can use the Fibonacci tool to help you find potential entry points.
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