As we mentioned in the previous chapter, while the Fibonacci retracement tool can be super useful, it should NOT be used all by its lonesome self. Instead, combining Fibonacci retracement levels with other technical analysis indicators can help you increase your chances for profits.
Seriously, it can make wonders when combined. I mean, Fibonacci numbers, named after the Italian mathematician Leonardo Fibonacci, are a special sequence of numbers that you’ll be surprised how accurate and useful they can be in forex trading.
In technical analysis, for that matter, these crucial Fibonacci sequences are typically translated into the following numbers: 23.6 38.2 50 61.8. And because these Fibonacci retracement levels are static prices followed by so many forex traders, it is another useful trading tool that can help get better future results.
Anything to tilt the odds in your favor… ARE WE RIGHT?!
Ready to get this pip show started? In this short tutorial, we are going to show you how to use Fibonacci ratios and combine them with support and resistance levels.
Combining Fibonacci Retracement with Support and Resistance is a great way to enhance your trading strategy.Andrew Lockwood, Mentor at HowToTrade.com
Trading using Fibonacci retracement levels combined with support and resistance is quite easy. All you have to do is to wait for zones where both collide.
If Fibonacci retracement levels are already support and resistance areas, and you combine them with other price areas that many other traders are watching, then the chances of price bouncing from those areas are much, MUCH higher. This can be largely attributed to the herding behavior in financial markets, and especially in the forex market. Nowadays, many forex websites and trading platforms offer a built-in feature where you get access to Fibonacci ratios so any trader can find support and resistance profit targets.
With that being said, you need to know how to identify the right support and resistance horizontal lines and add Fibonacci retracements to a trading chart. But that’s something you can easily do if you have access to the most basic trading platform that comes with technical indicators like Fibonacci retracement lines, moving average line, RSI, etc. I mean, the platform does all the work for when you draw a Fibonacci sequence into a trading chart so there’s no need to actually calculate Fibonacci retracement levels.
But that’s enough talk. Let’s see how combining support and resistance levels with Fibonacci retracement levels looks like on an actual Forex price chart. As an example, below we have drawn Fibonacci retracement levels on an hourly price chart of EUR/USD.
Looks like it’s in a downtrend, right? Maybe you’re thinking you want to get in on this short EUR/USD bandwagon below the Fibonacci level of 38.2%. But the question is, when and where should you enter a trade…
Time to bust out your Fibonacci retracement tool and set your Swing Low and Swing High. The chart looks much sexier with those Fibonacci ratios anyway, doesn’t it? If you look closer, you can see that the 1.13479 price was a strong support level and it just happens to coincide with the 38.2 Fibonacci retracement level. Coincidence? probably not.
A good place to sell? I would say so. If you are an active day trader who places your price targets at the next Fibonacci level, you could essentially close your position at the 23.6 or 0.0 Fib retracement levels.
Let’s see what would have happened if you had placed an order around that 23.6 Fibonacci retracement level.
You would have been a pretty happy camper! You can do the same setup on an uptrend as well. The point is to look for price levels that seem to have been areas of interest in the past. If you think about it, there’s a higher chance that the price will bounce from these levels. Why?
Firstly, with traders looking at the same support and resistance levels, there’s a good chance that there will be a number of orders around those levels. In other words, these important Fibonacci ratios turn out to become significant price points as they are used by many forex traders.
Secondly, with many traders using the Fibonacci retracement tool, there is a big chance they are looking to jump in on these Fibonacci levels themselves. And whilst there is no guarantee that the price action will actually bounce from these levels, you can at least have more faith in your trade.
At the end of the day, trading is all about probabilities and if you combine these two technical analysis tools, the chances are that the signals you get are more reliable. If you stick to those higher probability trades and use the Fibonacci golden ratio, then there’s a better chance you’ll come out the other (better) end.
After all, applying Fibonacci retracements can simply help you find entry and exit levels, and can be even more useful when combined with other technical indicators like support and resistance and moving averages. Speaking of moving averages, let’s move on to the next course that will help you understand how to use a moving average line in your forex trading.