The first thing you should understand is that when the market is trending, the Fibonacci tool works best.
When the market is in an upward trend, the wise choice is usually to buy or buy before the exchange rate retraces to the Fibonacci support level. When the market is in a downward trend, it is best to retrace the exchange rate to Fibonacci Choose short or sell at the resistance level.
In order to find these retracement levels, you must first find the nearest band high and band low. Then, for the downtrend, select the Fibonacci drawing tool, click the high point of the recent band with the mouse, and drag the mouse to the low point of the nearest band.
For an upward trend, the drawing process is the opposite of a downward trend.
do you understand? Now, let us look at some specific examples of how to use Fibonacci retracement in the market.
First, click the low of the band on April 20, 0.6955, and drag it to the high of the band on June 3, 0.8264, the software will automatically show you the Fibonacci retracement level you have drawn.
As shown in the chart above, the Fibonacci retracement levels are: 0.7955 (23.6%), 0.7764 (38.2%), 0.7609 (50.0%), 0.7454 (61.8%) and 0.7263 (76.4%).
Now, the market expects that if the AUD/USD retraces from its recent highs, the exchange rate will be supported at a certain Fibonacci retracement level, because as the exchange rate falls, traders will place buy orders near these prices.
Now, let us look at the trend after the exchange rate reaches the high of the band:
After the AUD/USD retracement fell below the 23.6% Fibonacci retracement level, it continued to fall in the coming weeks. The exchange rate even tested the 38.2% retracement level, but it was difficult to close below the line.
Then, around July 14th, the market resumed its upward trend and finally broke the previous wave high. Obviously, buying at the 38.2% retracement level is profitable in long-term trading.
Now, let us see how to use the Fibonacci retracement tool in the downward trend.
The following figure is a 4-hour chart of EUR/USD:
The high of the band is seen at the high of 1.4195 on January 26, and the low of the band is seen at the daily low of 1.3854 a few days later on February 2. Fibonacci retracement levels are 1.3933 (23.6%), 1.3983 (38.2%), 1.4023 (50.0%), 1.4064 (61.8%) and 1.4114 (76.4%).
The market’s expectation of a downtrend is that if the exchange rate retraces from the low of the 1.3854 band, it will encounter resistance at a certain Fibonacci level because traders will place sell orders at the above price levels.
Is the EUR/USD trend perfect?
The exchange rate first tried to rebound, and after a short encounter at the 38.2% Fibonacci retracement level, it rebounded to test the 50% retracement level. If you place some sell orders at the 38.2% or 50% Fibonacci retracement level, then you will profit from it.
From the above two examples, we can see that the exchange rate obtained short-term support or resistance at the Fibonacci retracement level. Because almost everyone is using Fibonacci tools, these levels will become self-fulfilling resistance and support levels.
However, one thing you must remember is that prices do not always rebound from these levels. You must be alert to some possible “death zones”. We will explain to you in detail later.
Now, you should always remember that the use of Fibonacci tools is not always that simple. If they are so simple to use, traders will always place their orders at Fibonacci levels, and the market will continue to trend forever.