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What Are the Mistakes to Avoid When Using the Fibonacci Retracement Tool?

What Are the Mistakes to Avoid When Using the Fibonacci Retracement Tool?
Asked by
Anna Winter time-icon1 month ago
1 Answer Answer Question

Sheila Olson
Answered time-icon1 month ago

Most Forex traders will end up using the Fibonacci retracements at some point during their career. Some traders may use it occasionally, while others might make use of it frequently.

Regardless of how often the tool is used, it is essential to use it in the right way for every trading scenario.

Traders who apply the Fibonacci retracement tool in the wrong way can expect poor results. Such traders usually fall into the traps of bad entry points and huge losses on different asset positions.

Therefore, it’s crucial for every trader who intends to make a good profit on the Forex market to understand some of the common mistakes traders make. Avoiding these can reduce your chances of suffering big losses, especially during adverse market conditions.

4 major mistakes traders make when using the Fibonacci Retracement

1. Plotting the Fibonacci reference point incorrectly

Keeping consistent reference points is something most traders must look out for when plotting Fibonacci retracements. Any trader referencing the lowest price of a trend channel at the close of a trading session or the body of the candle must know that the best high price needs to be available within the body of a candle at the top of a price trend – wick to wick and candle body to candle body.

Traders analyse incorrectly once they mix up the reference points, plotting from a candle wick to the body of a candle.

For example, in the AUD/USD currency chart below, we see a great example of consistency with reference points.

Image showing Fibonacci retracement applied to price chart on AUD/USD currency pair

The Fibonacci retracement on the chart has a solid wick-to-wick plotting from a high of 0.78958 to a low of 0.76245. As a result, we see a clear-cut resistance level at 0.76886 that price has tested several times and did not break.

The next chart below shows inconsistency.

Image showing Fibonacci Retracement applied incorrectly on the AUD/USD chart

Here, the plotting of the Fibonacci retracements is wrong, with the first reference point on the high close of 0.76555 (9.2 pips below the wick high) and the lowest price on a wick at 0.73458.

Thus, the resistance level at 0.74185 cuts through several price candles, which isn’t a good enough reference level.

Support and resistance levels become clearer to the naked eye when the plotting of the Fibonacci is consistent.

2. Neglecting long-term trends

Most new traders focus on significant moves and pullbacks in short-term trades without paying attention to the big picture. This myopic perspective makes short-term traders a bit misguided.

More experienced traders keep tabs on long-term trends. They do this to apply the Fibonacci retracements in the right direction of the momentum to set themselves up for huge opportunities in the market.

3. Relying on Fibonacci alone

The Fibonacci retracements provide reliable trade setups, but not with a confirmation.

Therefore, applying additional technical tools like stochastic oscillators or MACD will enhance huge trade opportunities.

Without other solid indicators, a trader may act on mere hope for a positive outcome.

4. Using the Fibonacci for extremely short intervals

It’s interesting to get involved in intraday trading in Forex, although there’s a lot of volatility.

Using the Fibonacci retracements for only a short time isn’t very effective. The shorter the timeframe, the less reliable the retracement levels will be.

Volatility and Fibonacci retracements don’t mix well. The reason is simple: a shorter timeframe skews resistance and support levels, which could make it difficult for a trader to choose what levels to trade.

Also, in the short term, whipsaws and spikes are common. Such dynamics can make it difficult to place a stop loss or take profit points because the Fibonacci creates tight and narrow confluences.

Therefore, with the retracements, it’s best to avoid short time frames like the one to 15-minute time frames for intraday trading. Instead, settle for the one to four-hour time frames for intraday trading because they’re more reliable.

The bottom line

It takes time to become highly experienced at using Fibonacci retracements in Forex trading, just like any other speciality.

Smart traders know that the long-term rewards of the Fibonacci always outweigh the costs. They don’t allow themselves to get frustrated. Instead, they follow the rules and stay away from the common mistakes most traders make.

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