In the previous lesson, we said that support and resistance levels can be broken at any time.
Since this indicator is used to determine support and resistance areas, a break of the level can also apply to Fibonacci.
Applying Fibonacci retracements is NOT always effective! This indicator is not as easy as one might think.
A failed example using the Fibonacci retracement indicator.
Below is a 4-hour chart for GBP/USD
Based on the downtrend in the GBP/USD price movement, the Fibonacci retracement indicator which will help find a good entry point, by determining the Swing High point at 1.5383 and the Swing Low at 1.4799, then draw the Fibonacci retracement line between the two points.
After waiting for a while, you see that the price position is at the 50% level and think it's a good time to open a SELL position based on the analysis of the trend of the GBP/USD currency pair.
And you start dreaming of earning money and buying everything you want.
But in reality, if the order is set at that point, it will make you BANKRUPT especially if you don't apply risk management.
The following is a continuation of the GBP/USD price movement above.
It turned out that the movement of GBP/USD continued the trend until it broke the 50% level and passed the Swing High point.
HEY, what lessons can be drawn from this GBP/USD movement?
Fibonacci retracement levels provide great opportunities and opportunities for profit in trading. But there is one thing we must remember that this indicator does not always work effectively.
Sometimes it can reach 50% or even 61.8% before the price reverses. There are even times when the price ignores this indicator and breaks all levels.
Remember, the market will not always continue an uptrend after finding temporary support or resistance, but will instead continue past the latest Swing High or Low.
Another problem with using the Fibonacci retracement indicator is determining which Swing Low and Swing High to use.
Everyone sees charts differently, sees time frames differently, and has their own forecast bias. It is very possible that Stephen from Pipbuktu and the girl from Pipanema have different ideas about where the Swing High and Swing Low points should be.
The bottom line is that there's no absolute way to do it, especially when the trend on the chart isn't very clear. Sometimes it becomes a guessing game.
That is why it is necessary to combine the Fibonacci retracement indicator with other indicators to minimize the risk of errors and help increase profit opportunities.
In the next lesson, we will explain how to combine the Fibonacci retracement indicator with support and resistance and candlesticks.