On the other edge how to use Fibonacci Retracement, is a useful technical indicator for determining buy and entry sells when prices pass a retracement level, but Fibonacci retracement is not safe always.
When the Fibonacci level has been reached and several signals appear, it is not always a signal that will give a profit, sometimes the signal that comes only fools and causes losses in your trade.
Therefore in other words that the Fibonacci retracement is not safe, it does not always provide a valid entry signal and make a profit.
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Fibonacci retracement not foolproof
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Support and resistance are not always safe, sometimes there is a breakout when prices have reached this zone.
Likewise, with the Fibonacci retracement level, it will not always be safe as a retrace signal during trending markets, at the retracement level, sometimes there is a confirmation signal when several candlesticks hold at a certain retracement level, and you will think this is the best time to open a position.
But after a few moments later it turns out that your position gets a floating minus because the price breaks the retracement level again.
Here is just an example that Fibonacci retracement is not always safe.
Example in real trading
The image below is a GBP / USD pair on a 4-hour timeframe.
We see from the image above that market conditions are in a downtrend.
Then you look for swing high and swing low points to draw a Fibonacci retracement.
You find the swing high at 1.5383, and a swing low at 1.4799.
With high confidence then you observe the price behavior at each retracement level which is a support and resistance level.
You have imagined if the price has reached the retracement level and there are signs that it is a strong area.
Then if meet your requirement immediately you open order.
And then only wait for the time until the profit comes to fulfill your imagination.
After the price has passed the 23.6% level you are still waiting.
There is no sign that this is a strong resistance area.
And the price is rising back up to the 38.2% level.
At this level, you are also waiting patiently because there is no sign that this is a strong resistance area.
In the end, the price moves up again and reaches the level of 50%.
Hmm, this is a strong resistance level because it is marked by 5 candlesticks that move flat and parallel to each other.
With confidence, you open sell and believe that soon the price will move downtrend again continuing the previous initial trend.
After you open your position then you casually go to the kitchen and take a cup of coffee and suck a cigarette while waiting for your profit to be reached.
But look what happens, if you take a sell position at this level, it turns out the price moves against the direction of your position, so you get a serious loss, even if you are too confident by using all the free margins, you will get a stop out account.
Take a look at what happened
After your position is active, it turns out the price is moving towards the next retracement level.
Until finally, a broken swing high and move above the swing high where you start drawn Fibonacci.
Which the trend reversal is more dominant even though the price was consolidating at the 50% level.
The lesson we can learn is, while Fibonacci gives a good signal like other technical tools, but it doesn’t always work perfectly.
What the lesson?
Read also Trend lines forex, what are trend lines?
Sometimes Fibonacci has given an indication for support and resistance through the retracement level, it might hit the 50% level.
Or maybe 38.2%, but after that, there might be a continuation of the trend after the previous trend ends.
Remember, that not always the market will repeat the previous trend’s movements.
After finding temporary support and resistance at the retracement level.
Sometimes the trend changes make it break swing high when plotting Fibonacci on a downtrend.
Another problem that occurs is the difference in plotting Fibonacci at different timeframes.
And also when determining different swing highs and swing lows.
Given these differences, traders will get different retracement levels on prices.
Because of differences in determining swing highs and swing lows and timeframe.
What needs to be underlined is that there is no absolute way to do that, especially when the trend is not very clear.
Sometimes just like a guessing game
How to overcome the problem?
Maybe there are no perfect indicators, even with the Fibonacci retracement sometimes still fails.
But by familiarizing discipline with trading rules, the probability of trading using this Fibonacci retracement will be higher than the failure.
You just need to train and always to discipline by monitoring prices at the retracement level.
Or you can also by adding other tools that support trading decisions when prices have entered the retracement level.
In addition to technical conditions, another way to overcome Fibonacci problems is to adjust the size of your position, not to use a high position size, prepare the risk as to the first.
It may be that you are interested in getting a large profit in a short time, but if it makes you forget about the risk.
Something bad might happen to your trading account.
In addition to adjusting the position size of low-risk.
Also, prepare stop loss below or above the retracement level which is temporary support and resistance.
Thus if the price moves not in accordance with expectations, stop loss will stop losses at your risk limit.
There is still much chance on another day, with the remaining free margin you try again using the Fibonacci retracement.
If you are not sure about this tool, you can try it with a demo account, test it until you are really confident.
Final Thought
The golden ratio of Fibonacci found in nature can be applied to sunflower formations, human body anatomy and so on.
Traders use Fibonacci because even though it is hundreds of years old.
It is believed that the golden ratio of Fibonacci can be applied in the forex and CFD financial markets.
But in reality, the Fibonacci golden ratio doesn’t always work well.
But it only helps traders determine entry through retracement levels.
In the end, you should pay attention to money management and risk management as a way to minimize risk when Fibonacci levels give false signals.
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