top 4 fibonacci retracement mistakes to avoid

5/26/2015 Top 4 Fibonacci Retracement Mistakes To Avoid

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Every foreign exchange trader will use Every foreign exchange trader will use Fibonacci retracementsFibonacci retracements at some point in their trading career. Some will use it just some of at some point in their trading career. Some will use it just some of

the time, while others will apply it regularly. But no matter how often you use this tool, what's most important is that you use itthe time, while others will apply it regularly. But no matter how often you use this tool, what's most important is that you use it

correctly each and every time. (For background reading on Fibonacci, see correctly each and every time. (For background reading on Fibonacci, see Fibonacci And The Golden RatioFibonacci And The Golden Ratio.).)

TUTORIAL:TUTORIAL: Top 10 Forex Trading RulesTop 10 Forex Trading Rules

Improperly applying Improperly applying technical analysistechnical analysis methods will lead to disastrous results, such as bad entry points and mounting losses on methods will lead to disastrous results, such as bad entry points and mounting losses on

currency positions. Here we'll examine how currency positions. Here we'll examine how notnot to apply Fibonacci retracements to the foreign exchange markets. Get to know to apply Fibonacci retracements to the foreign exchange markets. Get to know

these common mistakes and chances are you'll be able to avoid making them - and suffering the consequences - in your trading.these common mistakes and chances are you'll be able to avoid making them - and suffering the consequences - in your trading.

1. 1. Don'tDon't mix Fibonacci reference points. mix Fibonacci reference points.

When fitting Fibonacci retracements to price action, it's always good to keep your reference points consistent. So, if you areWhen fitting Fibonacci retracements to price action, it's always good to keep your reference points consistent. So, if you are

referencing the lowest price of a trend through the close of a session or the body of the referencing the lowest price of a trend through the close of a session or the body of the candlecandle, the best high price should be, the best high price should be

available within the body of a candle at the top of a trend: available within the body of a candle at the top of a trend: candlecandle body to candle body; wick to wick. body to candle body; wick to wick. (Learn more about candles(Learn more about candles

in in Candlestick Charting: What Is It?Candlestick Charting: What Is It?))

Misanalysis and mistakes are created once the reference points are mixed - going from a candle wick to the body of a candle.Misanalysis and mistakes are created once the reference points are mixed - going from a candle wick to the body of a candle.

Let's take a look at an example in the euro/Canadian dollar currency pair. Figure 1 shows consistency. Fibonacci retracementsLet's take a look at an example in the euro/Canadian dollar currency pair. Figure 1 shows consistency. Fibonacci retracements

are applied on a wick-to-wick basis, from a high of 1.3777 to the low of 1.3344. This creates a clear-cut are applied on a wick-to-wick basis, from a high of 1.3777 to the low of 1.3344. This creates a clear-cut resistance levelresistance level at 1.3511, at 1.3511,

which is tested and then broken. which is tested and then broken.

Figure 1: A Fibonacci retracement applied to price action in the euro/Canadian dollar currency pair.Figure 1: A Fibonacci retracement applied to price action in the euro/Canadian dollar currency pair.

Source: FX IntellichartsSource: FX Intellicharts

Figure 2, on the other hand, shows inconsistency. Fibonacci retracements are applied from the high close of 1.3742 (35 pipsFigure 2, on the other hand, shows inconsistency. Fibonacci retracements are applied from the high close of 1.3742 (35 pips

below the wick high). This causes the resistance level to cut through several candles (between February 3 and February 7),below the wick high). This causes the resistance level to cut through several candles (between February 3 and February 7),

which is not a great reference level.which is not a great reference level.

Figure 2: A Fibonacci retracement applied incorrectly.Figure 2: A Fibonacci retracement applied incorrectly.


By keeping it consistent, support and resistance levels will become more apparent to the naked eye, speeding up analysis andBy keeping it consistent, support and resistance levels will become more apparent to the naked eye, speeding up analysis and

leading to quicker trades. leading to quicker trades. (To read more about reading this indicator, see (To read more about reading this indicator, see Retracement Or Reversal: Know The DifferenceRetracement Or Reversal: Know The Difference.).)

Top 4 Fibonacci Retracement Mistakes To AvoidTop 4 Fibonacci Retracement Mistakes To AvoidBy By Richard LeeRichard Lee | February 06, 2011| February 06, 2011



2. 2. Don'tDon't ignore long-term trends. ignore long-term trends.

New traders often try to measure significant moves and pullbacks in the short term - without keeping the bigger picture in mind.New traders often try to measure significant moves and pullbacks in the short term - without keeping the bigger picture in mind.

This narrow perspective makes short-term trades more than a bit misguided. By keeping tabs on the long-term trend, the traderThis narrow perspective makes short-term trades more than a bit misguided. By keeping tabs on the long-term trend, the trader

is able to apply Fibonacci retracements in the correct direction of is able to apply Fibonacci retracements in the correct direction of momentummomentum and set themselves up for great opportunities. and set themselves up for great opportunities.

In Figure 3, below, we establish that the long-term trend in the British pound/New Zealand dollar currency pair is upward. WeIn Figure 3, below, we establish that the long-term trend in the British pound/New Zealand dollar currency pair is upward. We

apply Fibonacci to see that our first level of support is at 2.1015, or the 38.2% Fibonacci level from 2.0648 to 2.1235. This is aapply Fibonacci to see that our first level of support is at 2.1015, or the 38.2% Fibonacci level from 2.0648 to 2.1235. This is a

perfect spot to go long in the currency pair. perfect spot to go long in the currency pair.

Figure 3: A Fibonacci retracement applied to the British pound/New Zealand dollar currency pair establishes a long-term trend.Figure 3: A Fibonacci retracement applied to the British pound/New Zealand dollar currency pair establishes a long-term trend.


But, if we take a look at the short term, the picture looks much different.But, if we take a look at the short term, the picture looks much different.

Figure 4: A Fibonacci retracement applied on a short-term time frame can give the trader a false impression.Figure 4: A Fibonacci retracement applied on a short-term time frame can give the trader a false impression.


After a run-up in the currency pair, we can see a potential short opportunity in the five-minute time frame (Figure 4). This is theAfter a run-up in the currency pair, we can see a potential short opportunity in the five-minute time frame (Figure 4). This is the

trap. trap.

By not keeping to the longer term view, the short seller applies Fibonacci from the 2.1215 spike high to the 2.1024 spike lowBy not keeping to the longer term view, the short seller applies Fibonacci from the 2.1215 spike high to the 2.1024 spike low

(February 11), leading to a short position at 2.1097, or the 38% Fibonacci level. (February 11), leading to a short position at 2.1097, or the 38% Fibonacci level.

This short trade does net the trader a handsome 50-This short trade does net the trader a handsome 50-pippip profit, but it comes at the expense of profit, but it comes at the expense of the 400-pip advance that follows.the 400-pip advance that follows.

The better plan would have been to enter a long position in the GBP/NZD pair at the short-term support of 2.1050.The better plan would have been to enter a long position in the GBP/NZD pair at the short-term support of 2.1050.

Keeping in mind the bigger picture will not only help you pick your trade opportunities, but will also prevent the trade fromKeeping in mind the bigger picture will not only help you pick your trade opportunities, but will also prevent the trade from

fighting the trend. fighting the trend. (For more on identifying long-term trends, see (For more on identifying long-term trends, see Forex Trading: Using The Big PictureForex Trading: Using The Big Picture.).)

3. 3. Don't Don't rely on Fibonacci alone.rely on Fibonacci alone.

Fibonacci can provide reliable trade setups, but not without confirmation.Fibonacci can provide reliable trade setups, but not without confirmation.

Applying additional technical tools like Applying additional technical tools like MACDMACD or or stochastic oscillatorsstochastic oscillators will support the trade opportunity and increase the will support the trade opportunity and increase the

likelihood of a good trade. Without these methods to act as confirmation, a trader will be left with little more than hope of alikelihood of a good trade. Without these methods to act as confirmation, a trader will be left with little more than hope of a

positive outcome. (For more information on oscillators, see our tutorial on positive outcome. (For more information on oscillators, see our tutorial on Exploring Oscillators and IndicatorsExploring Oscillators and Indicators.).)

Taking a look at Figure 5, we see a retracement off of a medium-term move higher in the euro/Japanese yen currency pair.Taking a look at Figure 5, we see a retracement off of a medium-term move higher in the euro/Japanese yen currency pair.

Beginning on January 10, 2011, the EUR/JPY exchange rate rose to a high of 113.94 over the course of almost two weeks.Beginning on January 10, 2011, the EUR/JPY exchange rate rose to a high of 113.94 over the course of almost two weeks.

Applying our Fibonacci retracement sequence, we arrive at a 38.2% retracement level of 111.42 (from the 113.94 top). FollowingApplying our Fibonacci retracement sequence, we arrive at a 38.2% retracement level of 111.42 (from the 113.94 top). Following

the retracement lower, we notice that the stochastic oscillator is also confirming the momentum lower. the retracement lower, we notice that the stochastic oscillator is also confirming the momentum lower.



2015, Investopedia, LLC. 2015, Investopedia, LLC.

Figure 5: The stochastic oscillator confirms a trend in the EUR/JPY pair.Figure 5: The stochastic oscillator confirms a trend in the EUR/JPY pair.


Now the opportunity comes alive as the price action tests our Fibonacci retracement level at 111.40 on January 30. Seeing this asNow the opportunity comes alive as the price action tests our Fibonacci retracement level at 111.40 on January 30. Seeing this as

an opportunity to go long, we confirm the price point with stochastic - which shows an an opportunity to go long, we confirm the price point with stochastic - which shows an oversoldoversold signal. A trader taking this signal. A trader taking this

position would have profited by almost 1.4%, or 160 pips, as the price bounced off the 111.40 and traded as high as 113 over theposition would have profited by almost 1.4%, or 160 pips, as the price bounced off the 111.40 and traded as high as 113 over the

next couple of days.next couple of days.

4. 4. Don'tDon't use Fibonacci over short intervals. use Fibonacci over short intervals.

Day trading the foreign exchange market is exciting but there is a lot of Day trading the foreign exchange market is exciting but there is a lot of volatilityvolatility..

For this reason, applying Fibonacci retracements over a short time frame is ineffective. The shorter the time frame, the lessFor this reason, applying Fibonacci retracements over a short time frame is ineffective. The shorter the time frame, the less

reliable the retracements levels. Volatility can, and will, skew support and resistance levels, making it very difficult for the traderreliable the retracements levels. Volatility can, and will, skew support and resistance levels, making it very difficult for the trader

to really pick and choose what levels can be traded. Not to mention the fact that in the short term, spikes and to really pick and choose what levels can be traded. Not to mention the fact that in the short term, spikes and whipsawswhipsaws are very are very

common. These dynamics can make it especially difficult to place stops or take profit points as retracements can create narrowcommon. These dynamics can make it especially difficult to place stops or take profit points as retracements can create narrow

and tight confluences. Just check and tight confluences. Just check out the Canadian dollar/Japanese yen example below.out the Canadian dollar/Japanese yen example below.

Figure 6: Fibonacci is applied to an intraday move in the CAD/JPY pair over a three-minute time frame.Figure 6: Fibonacci is applied to an intraday move in the CAD/JPY pair over a three-minute time frame.


In Figure 6, we attempt to apply Fibonacci to an intraday move in the CAD/JPY exchange rate chart (over a three-minute timeIn Figure 6, we attempt to apply Fibonacci to an intraday move in the CAD/JPY exchange rate chart (over a three-minute time

frame). Here, volatility is high. This causes longer wicks in the price action, creating the potential for misanalysis of certainframe). Here, volatility is high. This causes longer wicks in the price action, creating the potential for misanalysis of certain

support levels. It also doesn't help that our Fibonacci levels are separated by a mere six pips on average - increasing thesupport levels. It also doesn't help that our Fibonacci levels are separated by a mere six pips on average - increasing the

likelihood of being likelihood of being stopped outstopped out..

Remember, as with any other statistical study, the more data that is used, the stronger the analysis. Sticking to longer time framesRemember, as with any other statistical study, the more data that is used, the stronger the analysis. Sticking to longer time frames

when applying Fibonacci sequences can improve the reliability of each price level.when applying Fibonacci sequences can improve the reliability of each price level.

The Bottom LineThe Bottom Line

As with any specialty, it takes time and practice to become better at using Fibonacci retracements in forex trading. Don't allowAs with any specialty, it takes time and practice to become better at using Fibonacci retracements in forex trading. Don't allow

yourself to become frustrated; the long-term rewards definitely outweigh the costs. Follow the simple rules of applyingyourself to become frustrated; the long-term rewards definitely outweigh the costs. Follow the simple rules of applying

Fibonacci retracements and learn from these common mistakes to help you analyze profitable opportunities in the currencyFibonacci retracements and learn from these common mistakes to help you analyze profitable opportunities in the currency

markets. (For related reading, also take a look at markets. (For related reading, also take a look at How To Become A Successful Forex TraderHow To Become A Successful Forex Trader or discuss or discuss other Fibonacciother Fibonacci

strategiesstrategies.).)

top 4 fibonacci retracement mistakes to avoid

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