Almost every trader who has even the smallest trading experience has tried at least once in his practice to use this very useful tool. Typically , Fibonacci levels are used to determine the starting points of a possible correction and to predict the future quote rate. This tool can also be used to confirm your forecasts. The Fibonacci level is a great thing that gives excellent results if you strictly observe the rules for its construction. For those who hear about this tool for the first time, we will first describe the main points that you should know for its use.
How to properly build Fibonacci levels
First of all, we note that the higher the time frame is selected on which the analysis will be performed, the more accurately the desired lines will be obtained and the more trust the points earned. First, the upper and lower extreme points are determined, and then the distance between them along the Y axis, i.e., the number of points is divided in relation to the sequence of the Leaning mathematician known to the whole world. If you use the classic metatrader platform, you don’t have to do any calculations, since the developers of this terminal took care of the corresponding option. It is enough to activate it: left-click on the extreme left extremum and, without releasing the key, stretch the cursor to the right extreme point. After that, each Fibonacci level will fall into place, and it will be possible to begin the analysis of the prevailing price dynamics on the chart. Despite the fact that the construction itself is done elementary simply, there are some nuances that must be borne in mind in order to get a good trading result.
What gives the Fibonacci level in trading
Any movement in our world has a certain cyclical nature: after the day, night falls, the tide comes after low tide, and the strong movement of the quote is inevitably replaced by a correction. Those who use the Ichimoku indicator know that after a sharp price impulse, as a rule, a rebound follows, reaching 50% of the distance traveled before. The question arises, but how then to calculate the return point, if instead of one powerful jerk we see a long series of alternating white and black candles, and it is noticeable that the current trend is coming to an end? This is exactly what the Fibonacci level will tell us. The most significant lines are those with 38.2%, 50% and 61.8% marks.
Common mistakes
When the Fibonacci level does not work, the reason for this is usually due to the following inaccuracies in the construction:
- Wrong anchor points. You can not go when setting lines from the body of the candle to the shadow. For example, if the trend is up and the first extremum is taken at the extreme low point of the candle (LOW), then the second extreme should also be at the extreme high point of the shadow (HIGH) and vice versa. As an alternative, you can also share open and close prices.
- Ignoring higher timeframes. Forex beginners often scalp and trade at small intervals. Moreover, the overall market picture often remains unaccounted for, and this increases the risk of trading against a strong trend.
- Analysis exclusively at Fibonacci levels. Despite the fact that it is a simple, effective and easy-to-use tool, you should not rely solely on it when drawing up your forecast for the quote selected for trading. The use of additional indicators, for example, such oscillators as RSI or Awesome oscillator, increases the chances of successful transactions.