Fibonacci corrective levels are horizontal lines that indicate possible support and resistance levels. At these levels it is possible to reverse the price direction.
The first thing you need to know about Fibonacci tools is that they work best in trendy markets .
The assumption is that when the market is bullish, we should buy time to correct the Fibonacci support level.
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And when the market is downtrending, sell the correction at the Fibonacci resistance level.
Fibonacci corrective levels are considered a technical forecast indicator as they try to identify future price directions.
The theory behind using Fibonacci levels is this: once the price starts a new trend, the price corrects or reverts a bit and then resumes the previous trend direction.
Find corrective Fibonacci levels
To find the corrective Fibonacci levels, you need to find the newly formed price ceiling swing and important price floor swing points (we explained what swing was in the previous lesson).
Then, for a downward trend, click on the ceiling swing and drag the cursor to the last price floor swing.
For the uptrend, click on the price floor point and drag the cursor to the newest price ceiling point.
God willing, you realized!
Now let’s look at some examples of how to apply Fibonacci correction in the chart.
Fibonacci in uptrend
This is the daily chart AUD / USD.
Here we draw the corrective Fibonacci levels by clicking on the floor swing at 0.6955 on April 20 and dragging the cursor to the ceiling swing at 0.8264 on June 3.
The software automatically shows you the correction levels.
As you can see in the chart, the Fibonacci correction levels are 0.7955 (23.6%), 0.7764 (38.2%), 0.7609 (50.0% *) and 0.7454 (61.8%). ) And 0.7263 (76.4%).
It is now expected that if the AUD / USD corrects from the recent ceiling, it will support one of these Fibonacci correction levels as traders enter the buy order at these levels with a return or price pullback. Given that the overall trend is bullish, traders are waiting for the trend to return.
* The 50.0 ratio is not officially a Fibonacci ratio , but it has found its place in the drawings as a Fibonacci level.
Now, let’s see what happened after the price ceiling was formed.
The price has pulled back from the level of 23.6% and continued its downward trend for the next two weeks.
He even tested the level of 38.2% but could not close below it.
Later, around July 14, the market resumed its upward movement and finally broke the price ceiling.
It is clear that buying at the level of 38.2% Fibonacci was a profitable deal in the long run!
Fibonacci in decline
Now, let’s see how we can use the Fibonacci correction tool in the downtrend. Below is a 4-hour EUR / USD chart.
As you can see, we saw the roof swing at 1.4195 on January 25th and the floor swing a few days later at 1.3854 on February 1st.
Correctional levels of 1.3933 (23.6%), 1.3983 (38.2%), 1.4023 (50.0%), 1.4064 (61.8%) and 1.4114 (76.4%) ) are.
The expectation for a downtrend is that if the price reacts from this floor, it may face resistance at one of the Fibonacci levels because traders who want to take advantage of the downtrend at better prices may have ready-made sell orders at those points. Have. In other words, sellers are lurking.
Let’s take a look at what happened next.
The market is trying to have a price rally. It is slightly below the 38.2% level before testing the 50.0% level.
If you have orders at the level of 38.2% or 50.0%, you were hunting for good pipes in this trade.
We saw real examples of the use of Fibonacci correction in transactions. In these two examples, we see that the price at the Fibonacci levels has had good support or temporary resistance.
Because of the many people who use the Fibonacci tool, these levels automatically become levels of support and resistance.
If enough market participants believe that a correction is occurring near the Fibonacci level and are waiting to open a position when the price reaches that level, then all those pending orders can affect the market price. Give.
The point to keep in mind is that prices will not always react to these levels. They should be seen as areas of interest, or as some call them, “deadly areas.” We will talk more about this later.
Remember that using Fibonacci is not always easy.
If they were that simple, traders would always place their orders at corrective Fibonacci levels, and markets would always be trending. We were all good and happy and rich.