There Are No Cast-Iron Guarantees With Fibonacci Retracement

Wouldn’t it be nice if your Fibonacci retracement tool was guaranteed to work every time?

Uh oh. No, it doesn’t. Earlier in your schooling, we said that support and resistance levels eventually break. That’s correct. So does Fibonacci. (And you thought that Italian genius was a mathematical god!).

Here is what happens when things go pear-shaped.

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This is a 4 hour chart of GBP/USD. The currency pair has been in a downtrend, so you used your Fibonacci retracement tool to try and find a good point to enter a trade. You found the Swing High at 1.5383, and the Swing Low at 1.4700. the pair has been holding at the 50% level for some while, so everything looks hunkey-dorey. So you go short.

Oops. Now you’re in trouble.

What happened was that the Fibonacci retracement levels actually failed to hold and the price went to new highs. In fact, the Swing Low was the bottom of the downtrend, and the market rose happily above the Swing High point.

What conclusions can you draw from this?

The answer is that Fibonacci retracement levels offer a better PROBABILITY of a successful trade, but they won’t work every single time. On some occasions, the price will just take absolutely no notice of what SHOULD happen, and blast through all the levels with a smug little smile on its’ face. The market will not resume its uptrend after finding a support or resistance level on every occasion, but may just carry on regardless beyond the recent Swing Low or Swing High.

One other thing which many traders find difficult is deciding which Swing Low and Swing High to use. Different people look at the market in different ways. We use different time frames, and all have our own opinions. You and I may have completely different ideas on where the Swing Low and Swing High points ought to be. The ultimate answer is that there is no one right way to do this.

This is why you should use the Fibonacci tool as just one of the possibilities, and combine it with other tools to give you a better chance of a successful trade. So in the next lesson, we’ll show you how to use candlesticks and other types of support and resistance levels, together with the Fibonacci retracement tool.