Fibonacci level in currency trading: typical mistakes and recommendations for building

Almost every trader, who has even the least experience in trading, tried to use this very useful tool at least once in his practice. Typically , Fibonacci levels are used to determine the starting points for possible correction and forecast the further quotation rate. You can also use this tool to confirm your forecasts. The Fibonacci level is a great thing, giving excellent results if you strictly follow the rules of its construction. For those who hear about this instrument for the first time, we will first describe the main points that should be known for its application.

How to build Fibonacci levels correctly

First of all, we note that the higher the timeframe is selected on which the analysis will be carried out, the more precise the desired lines will be obtained and the more points deserve more trust. First, the upper and lower extremal points are determined, and then the distance between them along the Y axis, that is, the number of points is divided in proportion to the sequence of the Pisan mathematician known to the whole world. If you use the classic metatrader platform, you do not have to do any calculations, because the developers of this terminal took care of the corresponding option. It is enough to activate it: click the left mouse button on the extreme left extremum and, without releasing the keys, extend the cursor to the right extreme point. After this, each Fibonacci level will be in its place, and it will be possible to begin the analysis of the existing price dynamics on the chart. Despite the fact that the construction itself is elementary simply, there are some nuances that must be borne in mind in order to obtain a good result in the trade.

What does the Fibonacci level in trade

Any movement in our world is characterized by a certain cyclicity: after a day comes night, the tide comes after low tide, and a strong movement of the quotation inevitably gives way to correction. Those who use the indicator Ichimoku, know that after a sharp price impulse, as a rule, there should be a rebound, reaching 50% of the distance traveled before. The question arises: how do we calculate the return point if instead of one powerful jerk we see a long series of alternating white and black candles, and noticeably that the current trend is coming to its end? This is exactly what the Fibonacci level will tell us. The most significant lines are those that stand at 38.2%, 50% and 61.8%.

Common Mistakes

When the Fibonacci level does not work, the reason for this is usually the following inaccuracies in the construction:

1. Incorrect reference points. You can not go when placing lines from the body of the candle to the shadow. For example, if the trend is upward and the first extremum is taken at the lowest point of the candle (LOW), then the second extremum should also be at the uppermost point of the shadow (HIGH) and vice versa. As an alternative, you can also share the opening and closing prices.
2. Ignoring the older timeframes. Beginners on Forex often engage in scalping and trade at short intervals of time. However, the overall picture of the market often remains unaccounted for, and this increases the risk of trading against a strong trend.
3. The analysis is exclusively at Fibonacci levels. Despite the fact that this is a simple, effective and easy-to-use tool, you should not rely solely on it when preparing your forecast for a quoted trade. Using additional indicators, for example, oscillators such as RSI or Awesome oscillator, increases the chances of successful transactions.