But we ain’t done yet! In this chapter, we will show you how to use various candlestick formations in combination with Fibonacci retracement levels, and what you should be looking for to increase your chances of success in forex trading.
As you already know, candlestick patterns tend to be reliable signals of a reversal in price action. Usually, when a reversal candlestick pattern appears when the price collides at the Fibonacci retracement level, the signal to enter or exit a trade is much stronger.
Therefore, reversal candlestick patterns combined with Fibonacci retracement levels portray a strong signal that price is likely to change direction. When combined together, the goal is to look for exhaustive candlesticks like a hammer or a shooting star Japanese candlestick formations. Why?
It’s simple. If you can tell when buying pressure or selling pressure is exhausted, it can give you a clue of when market price may continue trending. As an example, below is a 4-hour price chart of EUR/USD.
As you can see in the chart above, the currency pair seems to have been in an uptrend for the past couple of hours, but the move seems to have paused for a bit. Will there be a chance to get in on this uptrend? Let’s put the Fibonacci retracement tool to work!
As you can see from the chart, we’ve set our Swing Low and Swing High and drew Fibonacci retracement levels. We can clearly see a candlestick pattern formation on the Fibonacci levels. It seems that it formed a bullish engulfing pattern exactly at the 38.2 Fibonacci level.
Confirmation for a buy signal? We’d say so! Let’s take a look at what happened afterward.
You can see the Fibonacci retracement level held well when the reversal candlestick pattern appears at 23.6% Fibonacci sequence level. From there, the market continued to move to trade in an upward direction until the Fibonacci extension level reached the level of -38.2%. This could be interpreted as an additional confirmation that the price trend is expected to continue
If you had placed your order anywhere around the Fibonacci levels, you wouldn’t have been disappointed!
The bottom line, it’s almost impossible to use another type of forex chart in combination with Fibonacci retracements. I mean, can you see how the Fibonacci technical analysis tool can work on a line or a bar chart? Well, I don’t (maybe on Heikin Ashi chart type). That’s why Japanese candlesticks are the most popular and comprehensive chart type as they show crucial price points.
When you learn how to combine Fibonacci retracement levels with Japanese candlesticks, you’ll be surprised by how many small (and big) trade opportunities you can find in forex trading. Remember, Fibonacci numbers are used by many traders in the forex market. As such, these horizontal lines that become extremely important price levels can be used to help you pick out price trends and find potential support and resistance levels.
To sum up – This lesson just comes to show that when you combine Fibonacci retracement tools with Japanese candlestick patterns, you automatically increase your chances of a winning trade in the forex market.
And we all like winning…
Now, move on to the next lesson and download our Fibonacci levels cheat sheet.