In the previous lesson, we discussed that the Fibonacci Retracement levels are a self-fulfilling prophecy and are considered accurate by many traders.
However, remember that it is a golden ratio–not a miracle ratio! It still has its limitations.
Being too reliant on Fibonacci levels might lead to false signals and potential loss.
Below, we discuss some of the limits of the Golden Rule.
Just like other technical analysis tools, Fibonacci analysis can only provide you with confirmation once the price levels actually hit a level.
For any forex analysis tool, you are trying to predict price trends with the available price data you already have.
For example, let’s say that you want to open a long position on GBPUSD. You’ve charted the Fibonacci Levels on the GBPUSD price chart for 10:00 AM – 2:00 PM today.
Once charted, we’ve identified the most significant levels and their corresponding price for those four hours.
| Retracement Level | Price ($) | Support/Resistance |
| 38.2% | 1.3078 | Support |
| 61.8% | 1.3084 | Resistance |
| 100% | 1.3105 | Peak |
Let’s say that the GBP reached 100% of the Fibonacci Level at 1.3105. Based on your analysis, you expect the price to return to its support levels around 1.3078. So, you wait for it to revert to Support before you purchase.
However, you see that the price continues to rally.
Upon checking the news, you see that the European Central Bank has confirmed an interest rate cut, leading to increased sentiment.
Because we relied too heavily on the Fibonacci Sequence, and did not consider other market fundamentals, you were unable to buy the security at the price you wanted.
Another criticism faced by Fibonacci analysis is that there are too many levels that the price is always likely to reverse near one of them.
This makes it difficult to determine where the significant levels are because they can move from retracement levels to extension levels so seamlessly.
Especially in the forex market where prices are so volatile. Traders would have difficulty identifying which prices should be point A and point B, or what timeframes to select.
The retracement levels can be a powerful tool in predicting support and resistance levels on the price chart. However, there is no verification that prices will stop or break through these levels at all times.
It is important that traders broaden their knowledge of different types of analyses and use them in combination.
Now that we’ve got that out of the way, we can proceed to our next lesson! We’ll be discussing Fibonacci levels further!
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