Almost every trader with even the most minimal experience in trading has tried to use this very useful tool at least once in his practice. Typically, Fibonacci levels are used to determine the start points of a possible correction and predict the future rate of the quote. Also, this tool can be used to confirm your forecasts. The Fibonacci level is a great thing that gives excellent results if you strictly follow 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 to use it.
How to draw Fibonacci levels correctly
First of all, we note that the higher the timeframe is chosen on which the analysis will be performed, the more accurate the desired lines will be obtained and the more confidence the obtained points deserve. First, the upper and lower extreme points are determined, and thenthe distance between them along the Y axis, i.e. the number of points is divided in relation to the world-famous sequence of the Pisan mathematician. If you are using the classic metatrader platform, you will not have to do any calculations, as the developers of this terminal have taken care of the corresponding option. It is enough to activate it: left-click on the leftmost extremum and, without releasing the keys, drag the cursor to the rightmost point. After that, each Fibonacci level will fall into place, and it will be possible to start analyzing the current price dynamics on the chart. Despite the fact that the construction itself is elementary simple, there are some nuances that you should definitely keep in mind to get a good result in trading.
What gives the Fibonacci level in trading
Any movement in our world is characterized by a certain cyclicality: after the day comes the night, the tide comes after the tide, and a strong quote movement is inevitably replaced by a correction. Those who use the Ichimoku indicator know that a sharp price impulse is usually followed by a bounce, reaching 50% of the distance traveled earlier. The question arises, how then to calculate the point of return, 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 at 38.2%, 50% and 61.8%.
Typical mistakes
When the Fibonacci level does not work, the following inaccuracies in plotting are usually the reason for this:
- Incorrect 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 lower point of the candlestick (LOW), then the second extremum should also be at the extreme upper point of the shadow (HIGH) and vice versa. Alternatively, you can also share open and close prices.
- Ignoring higher timeframes. Beginners in Forex are often involved in scalping and trading on small time intervals. However, the overall picture of the market often remains unaccounted for, and this increases the risk of trading against a strong trend.
- Analysis exclusively at Fibonacci levels. Despite the fact that this is a simple, efficient and easy-to-use tool, you should not rely only on it when making your forecast for the quote chosen for trading. Using additional indicators, such as oscillators such as RSI or the Awesome oscillator, increases the chances of successful trades.
