As a trader, you may not use Fibonacci retracement all the time. However, like most foreign exchange traders, you will use this analysis method at one point or another in your trading endeavor. It is, therefore, essential for you to understand how Fibonacci retracement is used and apply it correctly every time you trade with it.
Many traders often have made losses on currency positions and wrong entry positions due to improper use of this technical analysis method. This article highlights the most common mistakes that traders make when applying Fibonacci retracement to foreign exchange markets. Understanding these mistakes will enable you to use this analysis method more effectively in the future.
Mixing Reference Points
Most beginners in foreign exchange trade often mix reference points when fitting Fibonacci retracements to price actions. For instance, when referencing the lowest price of a market trend through the body of a candle or the end of a session, the select the best high price as the candle’s wick instead of a point within the body of the candle at the top of a market trend.
Once you mix the reference points, you end up making the wrong analysis, and the mistake leads to disastrous results. To avoid this mistake, match candle body with candle body and wick to wick. Keeping reference points consistent makes the support and resistance levels more apparent, enabling you to speed up the analysis and trade more quickly.
Solely Trading with Fibonacci
Trading with Fibonacci provides you with reliable setups that can assist you in identifying trading opportunities. However, trading with Fibonacci alone will leave you feeling very uncertain about the decisions you make because it has little conformation ability. The market does not always resume a trend, whether upward or downward, after a temporary resistance or support. Sometimes market trends tend to go past recent awing low or high.
For this reason, Fibonacci retracement levels may not always work as expected when they give you a high probability of success. The price of goods may reverse before resuming the trend or increase before turning around. Hence, it’s always good to combine Fibonacci with other analysis tools for more excellent trade results.
Ignoring Long-Term Trends
Very few new traders keep long-term trends in mind when trading for the short-term. Most new traders focus on measuring significant moves and pullbacks in the short term. As a result of this narrow perspective, most new short-term traders make misguided trades that at times lead to huge losses.
Keeping long-term trends in mind gives the trader a precise analysis of the market and allows a trader to apply the Fibonacci retracement in the momentum direction. This approach also gives them numerous chances to earn great investment opportunities. Trading with long-term and short-term trends in mind helps you identify the best trade opportunities while preventing a selected trade from fighting the market trend.
Using Fibonacci to Trade in the Short-Term
The foreign exchange market is very volatile. This volatility skews support and resistance levels, making it challenging for a trader to choose or pick which stories to trade. When trading in the short-term, whipsaws and spikes are very common. These dynamics make it difficult for a trader to take profit points or place stops because retracement can create tight and narrow confluences.
It is important to note that the shorter the timeframe is, the less the reliability of retracement levels. Hence you could increase the reliability of Fibonacci retracement by sticking to longer timeframes when using Fibonacci sequences to improve the reliability of each price level.
Fibonacci is an excellent analysis method that could allow you to make good returns in the foreign exchange trade. However, as a new trader, you need to understand how Fibonacci retracement is applied to avoid making decisions based on incorrect analysis.
If you are a new trader, keep in mind that in some instances, trading in the long-term allows you to see a clear view of the market trends; combining Fibonacci resistance with other tools also enhances predictability. You thus don’t only identify trading opportunities but also keep the trade.