Fibonacci retracements are a popular technical tool used by Forex traders to predict market movements. The term is taken after the 13th century mathematician Leonardo Fibonacci and is based on his golden ratio.
Traders have met with a lot of success in using Fibonacci retracements and it is a method that intermediate to advanced traders heavily rely on. Unfortunately, its effectiveness as a technical tool will be useless if you don’t use it correctly.
In this article I will describe four commonly committed Fibonacci Retracement mistakes. Have you committed any of these?
Mixing Up Fibonacci Reference Points
Using Fibionacci retracements needs consistency. You need to keep your reference points consistent.
For example, if you want to reference the lowest value in a trend going through the close of a trading session or the candle body, the best high price you should mark should be within the candle body at the top of your identified trend. To make it easy for you, remember this simple rule – candle body to candle body and wick to wick. Mix up your reference points and you’ve got garbage in front of you.
Not Paying Attention To Long-Term Trends
Beginner traders have a tendency to measure important moves and pullbacks – but from the short-term perspective. They never look at it more holistically. This tendency to be myopic makes short-term trades inaccurate and also poorly informed. The correct thing to do is to look at the long term. When using Fibonacci retracements, it should be applied in the right direction of the momentum so that they can get the maximum opportunities.
Solely Depending On Fibonacci
It’s a common human reaction that if something works well, we start relying on it. But this is a serious mistake especially if we’re talking about something as complicated and technical as Forex trading. You need to use other technical tools as well. While Fibonacci can give good trade setups, it still needs confirmation and this can only be provided by looking at other tools.
MACD or stochastic oscillators are good tools that will help in identifying good trade opportunities and also increase your chances of getting a good trade. Confirmation is needed to make sure that you’ve taken the right direction, without it, your trade becomes wishful thinking.
Using Fibonacci In The Short Term
Some traders think that Fibonacci is a tool that can be applied anywhere and on any trading conditions. But the reality is, it is not an effective tool for short term trades. Remember that the shorter the time frame you use for analysis the less reliable the retracement levels get. The big factor here is volatility because it will affect the support and resistance levels, which makes it difficult for the trader to pick the levels where he will trade. Additionally, spikes and whipsaws also occur more frequently In short term positions.
It takes a lot of effort and time to become adept at using Fibonacci retracements and apply it to your Forex trade. Mistakes will happen but do not let it discourage you.
The list above already identified four common pitfalls that you can now avoid since you’ve already been forewarned. Keep studying and practicing and before you know it you’ll be reaping the benefits of using Fibonacci retracements.
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