Forex technical analysis: the combined use of Fibonacci and candle lines
If you have studied carefully in the previous course, you should now master the Fibonacci tool combined with support resistance levels and trend lines for simple but fairly effective trading strategies.
But this is not enough. In this lesson, we will teach you how to use the Fibonacci tool to trade with the Japanese candlestick pattern you learned before.
When choosing the Fibonacci tool in combination with the candle pattern, we will select the candle line that actually appears to have exhausted kinetic energy. If you can identify where the buying or selling pressure has exhausted, then the Fibonacci tool will give you clues as to when the price will maintain the trend.
EUR/USD has maintained a downward trend in the past week, but the downward trend seems to have been suspended recently. Is it a good opportunity to enter now? Let us start using Fibonacci tools.
As shown in the figure, we select the March 3 high of 1.3364 and the March 6 low of 1.2523 as our band high and swing low.
As it happens to be Friday, you plan to take an early break and decide when to enter after the weekend.
After the weekend, you open your technical chart and you see that the EUR/USD has gapped higher since Friday’s closing price level.
Although the 50.0% Fibonacci retracement temporarily stabilized, the buyer eventually pushed the exchange rate further higher. You decide to wait to see if the exchange rate will stabilize at the 61.8% Fibonacci retracement level. After all, the last candlestick pattern is extremely bullish, who will guarantee that the price will not rise further.
But what happened next? A doji star pattern with a long upper shadow formed near the 61.8% Fibonacci retracement level. If you look back at the courses you have taken in the second grade, you will know that Doji sends signals that the trend is exhausting and may turn. Has the buying pressure been exhausted? Will the resistance level remain stable at the 61.8% Fibonacci level? If possible, other traders are likely to be paying attention to this Fibonacci level.
Is it time to choose to go short? You can never know very clearly, which is why risk management is so important, but the probability of exchange rate reversal seems very high.
If you have chosen to go short after the formation of the Doji star form, your profits are already quite substantial. After the formation of Doji, the euro/dollar fell rapidly after a short pause.
It seems that the buyer is indeed quite tired, which makes the seller flock to the market and control the market. In the end, the exchange rate did not turn back and retreated to a swing low level. This wave of decline is about 500 points!
The combination of the Fibonacci tool and the candlestick pattern is quite effective, because it can show whether the Fibonacci level can hold.
If the price seems to stop at the Fibonacci levels, it may be that some other traders have placed some orders at these levels. This will provide further confirmation that there is indeed resistance or support at this price.
Another advantage of using the Fibonacci tool with the candlestick pattern is that you do not need to place limit orders at the Fibonacci level. You may be a bit worried about whether the exchange rate will be stable at these support or resistance levels, because we are looking for a price area, not a specific price level.
This is also where you can use the candlestick pattern.
You can wait until the dual formation of Fibonacci and the candle line is formed, for example, the candle line runs below the Fibonacci level or breaks through the Fibonacci level, then you can get the confirmation whether the order should be placed.
If the dual pattern of Fibonacci and candles is indeed formed, you can enter at the market price, because now you have more information to confirm that the exchange rate will be stable at this price level.