In our trendline lesson, we discussed how important trendlines are when charting an asset. Many technical analysts believe identifying trends or drawing a trendline is the first step to understanding the market.
Meanwhile, Fibonacci retracement levels allow us to find the most reliable support and resistance levels.
Combining these technical analysis tools can certainly increase the probability of profit!
Lesson Overview
- Drawing a trendline allows you to confirm support and resistance levels identified by the Fibonacci retracement levels.
- Combining Fibonacci retracement levels and trendlines increases the accuracy of trend prediction.
- The convergence of a price on the Fibonacci retracement level and the trendline are a logical entry point for your trade.
What is a trendline?
A trendline is a straight line that connects two or more points in a price chart.
It is used to visualize the price movement of a currency pair. Simply, it can indicate if a security is on a bullish or bearish trend!
A trendline can also move in a horizontal direction, which means the market is neither moving upwards nor downwards.
Trendlines help traders identify areas of support and resistance in a particular time period.
Need more than a refresher on trendlines? Read the full lesson here.
But wait a minute! Aren't Fibonacci retracement levels also used to identify support and resistance levels?
Yes! But Fibonacci retracement levels also tell us where a support and resistance levels may move next or when price patterns will repeat.
Essentially, adding a trend line to your Fib retracement levels can confirm where the support and resistance levels will move next.
How to confirm S/R levels with Fib and Trendlines
Let’s see how that applies to the forex chart.
Below is a one-hour chart of AUD/USD with Fibonacci ratios and a trend line.
We plotted the Fibonacci retracement levels by using the Swing High and Swing Low on the chart.
Meanwhile, the lower trendline is placed along the identified low points of the price. We can see that there is an upward movement and that prices will likely increase.
The next step is to identify where the Fibonacci level and the trend line intersect! In this chart, we can see that it intersects at around the 50% level.
We can assume that the safest price to enter a long position is when the prices hit the 50% fib level at around 0.66763. This is because we predict that this will become the next support level, based on the upward trendline.
Say you did wait for the price point to reach the 50% Fib level. Let’s take a look at what happened to the AUD/USD market!
After a few minutes, the price hit our buy signal zone and then proceeded with its bullish trend!
We can see that the support levels didn’t reach the 50% Fib level right away, but it was certainly worth the wait. Buying at 0.66763 has resulted in the most profitable long position.
It is also not unlikely that many other traders, who are also using the Fib retracement tool, was waiting for that price level to purchase. This is why we call the Fib levels a “self-fulfilling prophecy.”
Great! We’ve now used the Fib retracement levels and the trend lines to identify when to enter a long position.
Let’s do a quick recap!
Recap: Using Fibonacci Retracement Levels with Trend Lines
Using the trendline and the Fibonacci retracement levels helps you confirm where the next support and resistance levels might be.
The first step is to find the currency pair you want to trade. You can choose a pair based on your trading goals, trending currency pairs, or market analysis.
Once you’ve selected your currency pair, check the trend by drawing a trendline.
Once you’ve established the trendline, use a Fibonacci retracement tool by selecting the Swing Low and Swing High on the chart.
Identify where the Fib levels and trend line intersect and where the optimum buy or sell signal is on the chart.
By then, you can finally make your trade!
The Fibonacci levels truly are magical numbers. But they become transcendent when combined with other analysis tools.
In the next lesson, we’ll learn about using the Fibonacci retracement levels with Candlestick Pattern analysis.
