Successful forex trading using technical analysis depends on the proper application of technical indicators and tools Fibonacci, says Alexander Collins, a longtime trader on Wall Street.
It’s easy to implement a tool as Fibonacci levels retrospectively when price action is over and nicely fits, but the real challenge is how to apply Fibonacci tool when trying to determine where the correction will end and the main motion the trend will resume. In this part, we will try to identify common mistakes that traders make when using Fibonacci tools and how to avoid them.
Construction of Fibonacci levels in short frames
This is probably the biggest mistake made by traders using Fibonacci tools such as levels of Fibonacci retracement. Why is that? In Forex, market activity in a short period of time such as 15 minutes or one hour time frame was too short to effectively determine the trend of currency. What the trader can see a strong downtrend 1-hour chart and the 4 hour chart may actually be an adjustment of the daily chart. Trying to draw a Fibonacci retracement tool shorter period will end in disaster. Trends model converter for a longer period of time, such as daily chart, is usually a better determinant of this trend. The best thing you can do is to use a longer time to determine trends, to apply the tool and then switch to a shorter period of time to take your decisions on entry.
Excessive reliance on Fibonacci tools
In Forex is bad practice to use only one indicator of the performance of your technical analysis. The confirmation of the entrance is best done using two or three indicators that support and Fibonacci tools are no exception. To give an example, let us assume that the pair is in the process of downward correction after a particularly strong uptrend. Where is likely to stop the correction, especially given the fact that there are five possible levels of retracement (23.8%, 38.2%, 50%, 61.8%, 100%)? This is the place where you have to turn to other indicators such as Stochastics, MACD, or RSI for help.
Incorrect application of Fibonacci tools
Many times traders simply apply it incorrectly. What is wrong? Fibo tools are best represented from a peak reached to the bottom. If the trader does not use the highest and lowest points on the graph for the implementation of the function, the uncertainty is there and it is a clear example of incorrect application. Another example is the implementation of the function of the shadow of the candle to candle body, or vice versa. A trader must be consistent. For best results, always line on top of the upper shadow (wick) candle, which is the top of the wick of the lower shadow candle denoting the bottom.These are the most common mistakes made by traders use Fibonacci tools.
Avoid these mistakes to get the best results from the Fibonacci tools.
Trader Aleksandar Kumanov