Fibonacci retracements show the support and resistance stages where price might reverse direction. This tool is ideal for trending markets. The goal is purchasing at a support level during an uptrend and offloading at a resistance level during a downtrend.
Their regularity on historical Forex charts makes these retracements a useful indicator. However, treat Fibonacci levels as areas of possible swings instead of definitive points. Since retail traders stop exactly on the Fibonacci lines, it’s not uncommon for dealers to push price action past the supports or resistances.
This triggers numerous stops simultaneously leading to a cascading effect. Needless to say, traders don’t benefit because the price goes beyond the retracement zone. That’s why you should leave a gap around the expected reversal point.
Likewise, review past trends. Repeated testing strengthens a Fib level and raises the possibility of a similar future occurrence. You can also include extra tools like RSI to ascertain the outcome and spot hidden trading opportunities.