Fibonacci retracement lines are horizontal lines where there is potential support or resistance in a currency pair. These are drawn by the trader themselves, and they are meant to be used to discover where they may be price points that are worth taking a look at. It should be understood that Fibonacci lines tend to work best when the market is trending in one direction or the other, but you can certainly draw them ahead of time if you find that you just want to know where some good spots may be for trading.
Which Way Is The Market Trending?
The direction that the market is trending will be the first thing that you must look at in terms of figuring out how to draw your Fibonacci lines. If the market is in an uptrend, then you will want to draw the line from the most recent swing low to the most recent swing high. For a downtrend, you do the opposite.
It is actually pretty fun and simple to draw these lines, and you may discover that you enjoy it quite a lot as you are able to see what the market is doing under a variety of conditions. The Fibonacci retracement lines are automatically drawn for you based on the mathematical calculations that make up these specific sequences. It is therefore easy for you to see where there may be some spots of support or resistance that you want to isolate and look in on.
You can see in an uptrend where the currency may fall to, and where it may have some support to keep rallying higher. You might use this information to get in on the trade yourself and try to make some pips.
The same is true in the reverse for a downtrend.
If the market is in a downtrend, you will want to draw your lines starting at the most recent swing high all the way over the most recent swing low. You will then see where potential areas are for you to make a trade and get in on the trend.
Basically, what you are looking for is a continuation of the trend that has been going after it hits some resistance levels that you have drawn on your Fibonacci chart. If it hits those levels and then continues on the downtrend, then you are in great shape to make money on the continued momentum downward.
The last thing in the world that you want to do is try to fight the trends, so do everything in your power to ensure that the trend really is moving the way that you expect it to move. If this holds true, then you can place a trade after you have confirmation that your Fibonacci level has been touched but not breached. You can then take advantage of the long slide back down to levels that were even lower than the level that you initially got in at. If that is true, then you have indeed potentially found something worth taking a closer look at and potentially trading.
Whatever you do, make sure you always look for confirmation before assuming that your Fibonacci levels are drawn perfectly. A lot of people forget this step, and it can prove damaging to their portfolio when they make errors like that.
Be Patient With Fibonacci Charts
You need to be very patient when using Fibonacci charts. Not only are they challenging to learn how to draw in the first place, but you might also get some trades wrong if you try to act on them too quickly after certain price levels are hit. You always need to be patient and wait for the price to confirm what you suspect is happening before you can have a certain degree of confidence in your plays. Then, and only then, can you truly feel like you have made the right play on that currency pair.