There is a lot of information hype around Fibonacci Lines. There are ongoing arguments about the best time frame for Fibonacci retracement. Analysts are also discussing which levels are most important and which price best respects. 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.
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How do you use 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.
What is the best time frame for Fibonacci retracement?
It is impossible to categorically indicate the best time frame for Fibonacci retracement. Everything depends on several factors. The most important is of course the time horizon of the transaction. In day trading, we usually use 1m, 5m, 15m and 30m charts. In swing trading, we often use H1, H4 or daily charts. In position trading, it will be daily and weekly charts.
When writing about the errors in drawing Fibonacci patterns, I mentioned that it is better not to use this tool on charts with a time frame of fewer than 5 minutes. The reason, of course, is the proximity of the levels drawn.
However, I do not completely exclude the possibility of using Fibo diminutions on 1-minute charts. Why? Because some liquid markets have such high volatility at certain times that the levels set will be a few or a dozen pips away from each other. Just look at the EURUSD or GBPUSD on 1m charts at the opening of the London or New York session. On such volatile instruments, it is possible to distinguish nice waves for Fibo overlay. For a scalper, even an m1 chart may turn out to be the best time frame for Fibonacci retracement in case of high volatility of an asset.
What are the most common Fibonacci ratios?
Speaking of the best time frame for Fibonacci retracement, it is also worth recalling which Fibonacci ratios are most popular. The unquestionable number one is the correction reaching 61.8%. Besides, shorter measures at the levels of 38.2% and 50% are often used. The problem with the latter two is that the market stops there quite often, but it is a temporary stop after which the correction is deepened to the mentioned 61.8%. Personally, I like the 61.8% level also for the fact that from a deeper correction you can then participate in a longer price movement, if, of course, the expected price turnaround occurs at the assumed level.
How accurate is Fibonacci retracement?
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!