Leonardo Fibonacci is a famous Italian Mathematician from Pisa that introduced a simple and influential sequence of numbers that are now commonly known as the Fibonacci numbers.
The Fibonacci series of numbers start with zero, followed by one. You then add zero to one to get the third number. To get the fourth number, you add the second and third numbers, which are one plus one, to get two. This goes on until you get the largest number possible.
The numbers create ratios that describe the natural proportions of things in the physical world. This ratio is critical in maintaining the balance in nature as well as architecture. It is also essential in financial markets, and it helps traders to calculate both support and resistance levels in their trading strategies.
Whether you are an experienced forex trader or a beginner, you will use the Fibonacci retracements at one point in your trading career. Some traders use these numbers frequently, while others use them after a long time. No matter how frequently you use this tool, it is essential to use it correctly to avoid disastrous results, read more below.
So, what are the mistakes you should avoid?
1. Avoid mixing reference points
Most people tend to mix reference points when fitting the Fibonacci Retracements to the price action. This is a big mistake that can cost you a lot. So, it is critical to ensure your reference points are consistent at all times.
So, if you want to reference the lowest trend price using the close of a session or candle body, the best high price should be within the candle body at the top of a trend. In simple terms, the referencing should be candle body to candle body and wick to wick.
If you mix the reference points by going from candlewick to candle body, you will make a big mistake. Keeping your referencing consistent resistance and support levels become clearer. So, the analysis will be faster, which leads to quicker trades.
2. Never ignore long-term trading trends
Most new traders usually measure big moves and pullbacks in short-term trades without thinking about the long-term trends. This is a huge mistake, and it makes the traders misguided, and they will not see the bigger picture.
It is good to keep tabs on long-term trends as you can apply the Fibonacci ratio to show you the direction of the momentum. This keeps you ready for bigger opportunities in the future. If you have a big picture in mind, that is, long-term trends, you will be able to pick better trade opportunities. You will also prevent your trade from fighting the trend.
3. Do not use Fibonacci alone
Although the Fibonacci retracement system provides reliable trade setups, you must confirm that you are in the direction.
That is why you should use other technical tools like the moving action convergence divergence (MACD) or stochastic oscillators to support the trade opportunities. Using these tools increases the likelihood of better trade. Without these additional confirmation tools, you may not be sure whether the outcome will be positive.
4. Do not use Fibonacci Retracement for Short-Term Trade
Although day trading in the forex market is promising and exciting, it is very volatile, and it may end up being ineffective. This means that applying the Fibonacci system over a short-term trade will be ineffective. The retracements are usually very unreliable for a short time frame.
This is because volatility will skew both resistance and support levels, making it challenging for traders to choose the levels that can be successfully traded. More so, whipsaws and spikes are very common in the short-term trade. The retracements create tight and narrow confluences that make it challenging to place stops and take profit points.
Any statistical study requires more data to create a stronger analysis. Likewise, Fibonacci requires more statistical data, long-term trends in this case, to create reliable predictions. For this reason, it is essential to stick to longer time frames when using the Fibonacci retracements to improve the reliability of all price levels.
To become a guru in the Fibonacci sequence, you must take the time to study and practice everything critical. Even though it may be challenging, the rewards will take away all your pressures and frustrations. Ensure you follow all the Fibonacci rules and avoid making the mistakes we have mentioned above. This will help you better to analyze the most profitable opportunities in currency markets.