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Fibonacci Retracements are NOT Foolproof

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Support and resistance levels inevitably break, as we learned in Grade 1.

This also applies to Fibonacci, because Fibonacci levels are utilized to discover support and resistance levels. Fibonacci retracements aren’t always successful. They aren’t without flaws.

Let’s look at a scenario in which the Fibonacci retracement tool fails. A 4-hour chart of the GBP/USD is shown below. You notice that the pair is in a downturn and decide to use your Fibonacci retracement tool to help you find a decent entry position. The Swing High is 1.5383 while the Swing Low is 1.4799.   

For the previous few days, the pair has been stalling at the 50.0 percent level.

“Oh wow, that 50.0 percent Fib level!” you think to yourself. It’s holding the child! It’s time to get rid of this jerk!”

You sell a short at the market and daydream about driving down Rodeo Drive in your new Maserati with Scarlett Johansson (or Ryan Gosling if you’re a girl trader) in the passenger seat.

Now, if you really did place an order at that amount, not only would your aspirations be dashed, but your account would be severely harmed if you didn’t properly manage your risk!

Take a look at the events that transpired.

Now, if you really did place an order at that amount, not only would your aspirations be dashed, but your account would be severely harmed if you didn’t properly manage your risk!

Take a look at the events that transpired.

The price began to rally above the Swing High point, indicating that the Swing Low was the bottom of the downtrend.

What is the takeaway here?

While Fibonacci retracement levels increase your chances of success, they don’t always work, just like other technical tools. You have no idea if the price would reverse to 38.2 percent before resuming its upward trajectory.

It may reach 50.0 percent or 61.8 percent at times before turning back. Heck, just like LeBron James bullies his way down the lane with sheer force, the price will sometimes reject Mr. Fibonacci and blow through all the levels.

Remember that the market will not always restart its uptrend after encountering temporary support or resistance, but will instead push past the most recent Swing High or Swing low. 

Choosing which Swing Low and Swing High to utilize when utilizing the Fibonacci retracement tool is another prevalent issue.

People have diverse perspectives on charts, use different time periods, and have their own underlying biases. Stephen from Pipbuktu and the girl from Pipanema are likely to have opposing views on where the Swing High and Swing Low points should be.

The main line is that there is no one-size-fits-all approach, particularly when the trend on the chart isn’t so obvious. It can become a guessing game at times.

That’s why you should hone your skills and use the Fibonacci retracement tool in conjunction with other tools in your forex toolkit to increase your chances of success.

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