Fibonacci Retracement is one of the most well-known technical indicator. There are forex traders who think of it as a real life 'magic', but there are traders who are unable to use it correctly.
Fibonacci Retracement is one of the most well-known technical indicator among forex traders. There are traders who think of it as a real life 'magic', and there are traders who said that they have never been able to rightly use Fibonacci to decide on entry and exit level, let alone to pinpoint Take Profit and Stop Loss. Are you someone from the last group? Or have you feel the glory of using it, only to end up in painful drawdown afterward? If so, then you should check out this list of mistakes in using Fibonacci Retracement. Make sure you don't do any of it, and practice again in demo account.
1. Using Fibonacci Retracement In Extremely Short Timeframe
The optimal potential of Fibonacci Retracement could only be opened in mid-term timeframe, such as H1, H4. The lower timeframe will be full of noises that mistakes shall occur due to mistakenly identifying the underlying support and resitance. While the higher timeframe goes on for too long that Fibonacci levels will only be a surplus requirement. Therefore, Fibonacci Retracement is better suited for day trader than scalper or swing trader.
2. Ignoring Long-Term Trend
Just because the indicator is applied on mid-term timeframe, it does not mean that you should close your eyes to the long-term trend. Remember that prices now is a part of a much longer history of prices. So, take care to always take a peek at the trend in higher timeframe before you take action based on your decided timeframe's Fibonacci levels.
By doing that, you could also optimize your profit potentials. Say you usually trade with Fibonacci Retracement in H4. The levels send soft sell signal. Then you check it out on D1 timeframe, and you see strong buy signals on the chart. What to do? Well, rather than taking on peanuts, you would do better at making the trades based on the D1 timeframe.
3. Using Fibonacci Retracement In Non-Trending Market
The third mistake involved using Fibonacci Retracement in non-trending market. Fibonacci Retracement is based on price swings, or in another word, currency pair's ups and downs. Therefore, it is practically useless if you use it when the chart is flat.
If you prefer to trade consistently on one or two pair only, then check the ones with the almost constantly moving chart, such as Yen and Euro crosses, as well as commodity pairs. High volatility major pair like the EURUSD is great when it is trending, but it is also quite moody. Volatility changes, and prices on EURUSD or USDJPY could went flat for a day or two if there is no news or the market is in a state of 'wait and see'.
4. Placing The Key References Inconsistently
To create Fibonacci Retracement, you need to ascertain a key low and a key high. The thing is, you can't just place it anywhere along the respective candlestick haphazardly. If you have placed the key low on the closing price, then you need to place the key high on the closing price too. Another correct way to do that will be the most popular method, that is placing the references on the extremes, that is extreme low and extreme high. See these two screen cap to compare.
See the chart above. Note that the red line is drawn exactly from extreme prices at both end. That is the right way in drawing Fibonacci Retracement. Compare it with an example of the wrong one below.
Compared to the one before, this second picture seemed inconsistent, doesn't it!? While at one end, the key was placed in the body of the candlestick, at the other end it met with the lowest 'tail'. To achieve an optimum result, you should avoid doing this and take care to draw the Fibonacci Retracement correctly like in the first picture, on both extremes, or alternatively, on both bodies.
5. Over-reliance On One Indicator
Every traders must want to be able to master one technical indicator very well that he or she could rely 100% on it. But there are no perfectly flawless indicator in this world, and Fibonacci Retracement is not an exception to this rule. Just like you are advised to check the trend in higher timeframe, you should also check on other indicator in determining the entry and exit points.
It is advisable for you to use additional technical indicator to confirm what the Fibonacci Retracement have told you. For that purpose, there are some popular 'companion' indicator. MACD, Stochastic, and RSI are some of the most popular 'companion' that could be used along anything from Stochastic Oscillator, MA crossover, to Fibonacci Retracement. You could also combine Fibonacci Retracement with candlestick reading.
Well, those are some common mistakes in using Fibonacci Retracement. Or, have you experienced other kind of mistakes in using this indicator? Tell us on the space below. Let's share and talk about it.