Forex traders of all stripes will tell you that they prefer this indicator or that one. They will make their pitch as to why their specific preferred indicator is the one that you should pay the most attention to. However, you know that the reality is that a lot of different types of indicators are valuable in Forex trading, and it really comes down to using the indicators that you have available to make the most of your trading. You have to combine them in ways that make sense to you in order to formulate a strategy that will work.
Spotting Support And Resistance Levels
When you overlay the Fibonacci retracement tool over an active chart showing the current movement of a given currency pair, you will quickly see how the pair has performed on the time scale that you have set up for it. More importantly, you can see where there might be some potential resistance or support levels.
As you can see in the chart below, the Fibonacci levels serve as natural support and resistance zones.
If the latest candlesticks on the currency pair are touching one of the support or resistance levels as shown on the Fibonacci tool that you have laid out, then it might be time to place a trade that reacts to that data.
To set the Fibonacci tool up for use, simply find a recent swing high or swing low and use that as your starting point. Drag the Fibonacci tool out across the entire length of the chart that you are looking at, and you will see that it automatically draws up lines of support and resistance for you. You can use those data points to see when it might be right to enter a trade.
The most critical Fibonacci levels to pay attention to are the 23, 50, and 76% levels. The 50% level in particular tends to hold a lot firmer than some of the other levels might. It is around those levels that you will want to try to place your buy or sell order. If the part is hitting up against the 50% level and has been lower than the level previously, then it might be time to place a sell order as the pair may be ready to take a nosedive. On the other hand, you might want to place a buy order if the pair has fallen until it hits that level, as this might indicate that it is struggling to fall below that level. There is support at that level, and you should perhaps consider placing a buy order to take advantage of the trend.
You need to be careful not to put too much trust in all of your Fibonacci drawings, as they are prone to error at times. You should try to wait for confirmation that a trade really is hitting up against support or resistance before you jump right in. Just because it has touched your support or resistance line once doesn’t mean that the trend is baked in. You might need to wait until it comes back to that point a second time before you declare that your trade is correct. Then, and only then, can you start to have confidence that you have made the right moves. Your trading account will appreciate it if you don’t get overly confident by using any single indicator when there are so many to choose from.
And remember… Other traders are looking at the same support and resistance levels you are, and so there may be lots of orders at those levels which creates support and resistance.