Below are two examples of how Fibonacci retracements, when used in conjunction with candlestick patterns, can be useful indicators for suggesting when a trend will reverse itself. Note how Fibonacci retracements work in both bullish (upwards trending) and bearish (downwards trending) markets.
A Look at a Poor Fibonacci Trade
In order to learn how best to use Fibonacci retracements when trading the FX market, it is worth examining examples of traders often use them poorly.
The following example shows how being over eager can cause a trader to enter the market without justification.
In the chart below, see that price comes very close to touching the fib level (by 13 pips) but does not quite break it. While many traders may take that as a positive sign (they may rationalize that the level was so strong that traders did not wait for it to touch the fib level), you ideally want to see the level being breached. The reason for it is because breakout traders may come into the market, thinking that price will go lower, maybe even down to a lower fib level. When the market reverses and starts to go back into the trend, these short traders will now have to eventually cover their trades at a loss. Short traders who need to cover their positions will add to the buying pressure, thereby increasing the probability of your trade going in your favor.
ASSIGNMENT: Using a charting application of your choice, draw Fibonacci retracement lines on charts for the various currency pairs accessible through the trading station. Then, upon analyzing the charts, look for trading opportunities based on Fibonacci retracements. Reply to this thread telling us what trade you placed and why you placed it. In this case, the trade could be an entry order that is waiting for the price to retrace to a given Fib level. Feel free to upload an image of the chart you were looking at as well.
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