Fibonacci application failure
Recalling the previous knowledge, we said at the time that the support and resistance levels will eventually be broken. In terms of how to use Fibonacci levels to find support and resistance, this also applies to Fibonacci.
Now, let us look at the example when the Fibonacci retracement fails.
You see that GBP/USD is already in a downward trend, so you plan to use the Fibonacci tool to help you set a good entry point. The high point of the band you choose is at 1.5383 and the low point of the band is at 1.4799.
You can see that the following candlesticks of GBP/USD are stuck in a trend at the 50% Fibonacci retracement level.
So, you start to say to yourself, “Very good, the exchange rate has stabilized at the 50.0% retracement level, now it is time to short!”
You immediately short the market price of GBP/USD, so you start to take it for granted that you will make a big profit this time.
Now, if you really set a sell order at the 50% retracement level, this will not only break your sweet dreams, but if you do not manage risk control, it will also make your account looted.
Let’s look at what happened next?
The results showed that the low point of the band became the bottom of the previous downward trend, and the market began to rebound and break through the high point of the previous band.
What is the lesson from this lesson?
Although the Fibonacci level improves your success rate, it is not always as effective as other technical analysis tools.
In the use of Fibonacci tools, another common problem is the selection of the high point of the band and the low point of the band.
When investors make transactions, the graphics they choose will be different, the time period they choose will also be different, and they also have their own fundamental views. It is likely that Zhang San, Li Si, or Wang Mazi’s personal views on the highs and lows of the band are different.
At the very least, you should keep in mind that there is no absolutely correct way to trade foreign exchange, especially when the graphical trend is not very clear. Sometimes, it will become a guessing game.
This is why you need to hone your skills and use them in conjunction with Fibonacci tools and other tools in your foreign exchange toolbox, which will improve your chances of winning.
In the next lesson, we will show you how to use Fibonacci tools in combination with other forms of support, resistance and candlestick patterns.