How to Trade Forex: Combining Fibonacci with Candlesticks

14
Nov

If you have been reading our last few blogs, you would know by now that you can combine the Fibonacci tool with support and resistance levels and trend lines to create a simple but super awesome trading strategy.

If combining the Fibonacci tool with candlestick patterns, we are actually looking for exhaustive candlesticks. If you can tell when buying or selling pressure is exhausted, it can give you a clue of when price may continue trending.

Below is a 1-hour chart of EUR/USD

 

The pair seems to have been in a downtrend the past week, but the move seems to have paused for a bit. Will there be a chance to get in on this downtrend? You know what this means. It is time to take the Fibonacci tool and get to work!

As you can see from the chart, we've set our Swing High at 1.3364 on March 3rd, with the Swing Low at 1.2523 on March 6th. Since it's Friday, you decided to just chill out, take an early day off, and decided when you want to enter once you see the charts after the weekend.

 

By the time you popped open your charts, you see that EUR/USD has shot up quite a bit from its Friday closing price.

While the 50.0% Fibonacci level held for a bit, buyers eventually took the pair higher. You decide to wait and see whether the 61.8% Fibonacci level holds. After all, the last candle was pretty bullish! Who knows , price just might keep shooting up!

A long legged Doji has formed right smack on the 61.8% Fibonacci level. This is an "exhaustive candle". Has buying pressure died down? In resistance at the Fibonacci level holding? It is possible. Other traders were probably eyeing that Fibonacci level as well.

It is time to short? You can never know for sure (which is why risk management is so important), but the probability of a reversal looks pretty good!

If you had shorted right after the Doji had formed, you could have made some serious profits. Right after the Doji, price stalled for a bit before heading, straight down. Take a look at all those red candles!

It seems that buyers were indeed pretty tired, which allowed sellers to jump back in and take control. Eventually, price went all the way back down to the Swing Low. That was a move of about 500 pips! That could have been your trade of the year!

Looking for "Fib Sticks" can be really useful, as they can signal whether a Fibonacci level will hold. If it seems that price is stalling on a Fibonacci level, chances are that other traders may have put some orders at those levels. This would act as more confirmation that there is indeed some resistance or support at that price.

Another nice thing about Fibonacci sticks is that you don't have to place limit orders at the Fibonacci levels. You may have some concerns whether the support or resistance will hold since we are looking at a "zone" and not necessarily specific levels.

This is where you can use your knowledge of candlesticks formations. You could wait for a Fibonacci stick to form right below or above a Fibonacci level to give you more confirmation on whether you should put in an order.

If Fibonacci stick does form, you can enter a trade at market price since you now have more confirmation on whether you should put in an order. If a Fibonacci stick does form, you can enter a trade at market price since you now have more confirmation that level could be holding.

Combining Fibonacci with Candlesticks Summary:

Fibonacci Sticks are a useful signal whether a Fibonacci level will hold
If price is stalling on a Fibonacci levels this could indicate that other traders have put orders at those level, thus confirming that there is indeed some resistance or support at that price
If you want more confirmation wait for a Fibonacci Stick to form right below or above the Fibonacci level.

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