Traders use different tools of technical analysis. They need to be utilized properly otherwise they will bring poor results. Today I will show you how to avoid mistakes when using Fibonacci Lines. It is a popular indicator available on the IQ Option platform and described previously in detail in our Guide to Using the Fibonacci Lines to Trade Trend Retracement.
Contents
Fibonacci Retracement
Once you are logged in to your IQ Option trading account, make decisions about the asset to trade and the investment amount. Then, go to the graphical tools icon and you will find Fibonacci Lines.
Fibonacci Retracement or Fibonacci Levels or Lines measure upward and downward waves on the chart and thanks to this, are useful in identifying potential support and resistance levels. Naturally, they will serve only if you apply them correctly. How can it go wrong? Let's see.
Missing the beginning or the end of the wave
An upward wave begins at the bottom of the chart and moves to the top. A downward wave has an opposite direction, starts at the top, and goes to the bottom. You can see the tops and bottoms easily on the chart. The top is the highest point of the candle, the body, or the shadow. The lowest point will constitute the bottom.
You have to be consistent when drawing the lines. They have to be exactly at the bottom and the top. If you do not draw them correctly, you will miss opportunities or even lose money.
Look at the chart below and compare it with the chart above. On the chart below, level 61.8 is totally ignored. It is because the whole drawing is wrong.
Inaccurate time frame
Generally, Fibonacci Retracement can be used in various time frames. However, the smaller timeframe, the closer the Fibonacci lines to each other. This may result in wrong readings.
The best idea is to use at least 5 minutes chart timeframe. With the higher period, the Fibonacci Retracement will show better indications of future support and resistance.
Not getting a confirmation
It is wise to confirm trading signals. Entering the position without getting confirmation can lead to losses. It is also the case with Fibonacci Levels. So add some extra indicators such as an oscillator to obtain a signal validation. The Stochastic Oscillator works very well with the Fibonacci lines. You can observe divergences when the price reaches an important Fibonacci level. This is great confirmation that the price movement can reverse. Take a look at the “Cable” (GBPUSD) chart below. There is a bullish divergence when the price is approaching an important level of 61.8.
Final words
You can successfully use Fibonacci Retracements when you are doing it correctly. Adjust the timeframe of the chart, 5 minutes or more will be all right. Draw the lines precisely at the beginning and end of the waves. And do not forget to get some confirmation for the signals received.
Go to the IQ Option demo account and try to determine support and resistance levels with Fibonacci. Practice as long as you need to. It costs no money to use the demo account. After some time you will feel ready to start trading with real money.
Good luck!
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