Using Fibonacci Together With Candlesticks

Here we are going to learn how to use Fibonacci retracement with Japanese candlesticks, with which you are now familiar. When we use the two together, we are looking for exhaustive candlesticks, because if you are able to ascertain when either buying or selling pressure is exhausted, it can give you a very good idea of when the price may continue to trend.

Here is a 1 hour chart of EUR/USD

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The pair has been in a downtrend, but for the moment, it seems to have paused. This is where we need our old Italian friend Leo again. We have put the Swing High at 1.3364 which is on 3rd March, and the Swing Low three days later at 1.2523. However, as it’s Friday, you’ve decided to have a long weekend, and take another look when the market re-opens on Monday morning.

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Now, you can see that the pair has gone up quite a bit from the closing price on Friday. It did hover about around the 50% Fibonacci level for some while, but more buyers took it higher. The way that last very bullish candle looks, the price could just keep on going up.

However, see what happens next.

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There is a long Doji exactly at the 61.8% Fibonacci retracement level! Now, remember what a Doji signals? It’s an exhaustive candle. Is this a good time to go short? Are the buyers leaving the market in droves? You can’t be absolutely certain, but it certainly looks to be on the cards.

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You can see what happened. Just after the Doji formed, the price held for a bit, but then took off downwards like a free-fall parachutist. The buyers had given in, and the sellers were back in control. In fact, the price found its’ way all the way back to the Swing Low – which was a fall of around 500 pips!

Fibonacci candlesticks can be an extremely useful tool. They can give an indication of whether or not a Fibonacci retracement level will hold. In fact, if the price is stalling at that level, it’s likely that other traders will have put in some orders at the level, which will give confirmation that there is support or resistance at that particular price.

Another advantage of Fibonacci candlesticks is that there is no need for you to have a limit order in place at the Fibonacci levels. Remember, you are looking at a zone.

You can make use of your candlestick formation training here. You can wait for a Fibonacci candlestick to form immediately above or below a retracement level to confirm if you should put in an order. You can then just enter the trade at the market price.