The trend is your friend they say, and you will want to use this maxim when trading. It can help you select the buy or sell option on your favorite currency pairs based on the direction they have been trading in recent times. When you determine the trend (up or down), you will then want to draw a trend line on the chart to show how the pair has been moving.
Once you have your trend line in place, you will pull up your useful Fibonacci retracement tool to see the support and resistance levels that are relevant to the pair that you are examining. The Fibonacci levels are based on a complex mathematical formula used to try to predict where there are levels of support or resistance in a currency pair. Fortunately, you don’t have to know all of the math yourself, you just need to use the tool to get the figures you are looking for.
Plot the Fibonacci retracement over the currency pair and take a look at the various levels contained within it. Is the pair currently trading between Fibonacci levels, or is it right on the support or resistance line right now?
This is vital to your next decisions regarding either buying or selling the pair and setting your take-profit/stop-loss levels. You will want to combine the Fibonacci levels with the trend line and any other indicators that you might want to use in order to get a more complete picture of where to place your trade, and where to bail out of it when the time comes.
When a Fibonacci retracement intersects with a trend line, there may be a strong support or resistance zone there — as in the below chart.
Keep in mind that the Fibonacci lines that you draw are just one indicator among many, and they are only meant to be used to help you get a better idea of where some of the exit or entry points for a trade may be. You shouldn’t lean too heavily on any one indicator above all of the rest. There are plenty of indicators that you can use in combination with one another to get the most accurate picture of where a given trade is headed, and that is what you should do as a disciplined trader.