As discussed in the previous lesson, using Fibonacci Retracements are incredibly useful. However, they also have limitations.
Combining Fibonacci analysis with other technical analysis indicators can significantly improve your predictions!
Using these two tools in tandem can, without a doubt, elevate your trading experience!
In this lesson, we’ll discuss integrating Fibonacci ratios with support and resistance levels to increase the chances of accurately analyzing the market.
Lesson Overview
Combining Fibonacci retracement levels with support and resistance levels can enhance your forex trading strategy and profitability.
Most forex trading platforms have built-in Fibonacci tools that traders can easily use
Traders need to identify support and resistance zones before applying Fibonacci levels and see where they align
Quick Review on Support and Resistance
Support and resistance (S/R) levels are the highest and lowest points of price movements at a given time.
A support level occurs when there are more traders who want to buy a currency pair than those who want to sell it. This causes the prices to move up. This level is also called the “floor price.”
A resistance level occurs when sellers overpower buying interest. As a result, prices go down. This is also called the “ceiling price.”
Need more than a refresher? Review the Support and Resistance lesson in full here.
Got it? Great! We can move on to our lesson!
Combining Fibonacci Retracements with Support and Resistance Levels
So, how do we combine Fibonacci retracements with S/R levels?
The simple answer is to identify zones where these elements converge. You can spot potential support and resistance levels and see if they align with Fibonacci retracement levels.
When Fibonacci retracement levels align with S/R levels, their effectiveness increases (and hopefully your profit!). This is largely attributed to traders' psychology and the fact that Fib ratios are a “self-fulfilling prophecy.”
Related: TradersUnited - Market Sentiment Explained
Because many other traders will be eyeing these levels, it is highly likely that activity will happen where the Fib ratios and S/R levels align. This increases the probability of a price that you expect will go up or down.
Let’s look at an example of how you can combine support and resistance levels with Fibonacci ratios.
Take a look at this chart for USDJPY from 12:30 AM – 5:30 PM (JST).
Say that you are an intraday trader. You see that the currency pair is currently on an uptrend, and you are waiting for the maximum price point to short before you end the trading day.
Let’s try using the Fibonacci retracement tool and S/R levels to analyze!
On the chart, you can see that we have already applied the Fibonacci retracement tool. We used the low of 149.800 at 12:30 and the high of 150.800 at 5:30.
We can see that the support levels were tested between 3:00 – 3:30 at the 0.618 Fib level. It quickly climbed up to the swing high by 5:30.
By checking the Fib ratios and the potential S/R levels, we can conclude that the price has been constantly moving up since support was continuously tested at 3:00. Therefore, this might be a good time to open a short position and sell while the market is on a high!
Pro tip: Most forex trading platforms offer a built-in Fibonacci feature. This can automatically show you Fib ratios to help you identify support and resistance targets!
This method applies to downtrends as well. Let’s try another example!
Take a look at this 45-minute price chart of USDZAR.
Say you are a scalper and you want to open a short position.
Upon observing the market, we can see that support is fairly strong at the 0.236 Fib level with resistance just above it at the 0.382 Fib level. This tells us that the price probably won’t peak above resistance.
So, as soon as the price hits the resistance level, you enter your short position.
Taking this example even further, we can see that the price went down past two identified support levels already. This is a strong indicator that prices will continue to go downward.
Let’s take a look at the USDZAR price chart for the rest of the day.
Unsurprisingly, the currency closed at ZAR 17.61640. I bet you would have been happy about your sell entry earlier in the day!
As you can see, using Fibonacci retracement levels with support and resistance levels certainly enhances your forex trading strategies.
In the next lesson, we discuss using the Fibonacci levels with trend lines.
Challenge yourself further on CommuniTrade
Keep up to date with trading news, trends, and analysis on CommuniTrade. Ask questions, verify facts, start thought-provoking discussions with fellow traders.
