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Part IV. Sometimes Mr. Fibonacci could fail...really

Sometimes Fibonacci fails - Forex School
Commander in Pips: Although we’ve already seen how price action can break some Fibonacci levels, let’s take a look at how the market could destroy all of them. Also, let’s discuss how treat Fibonacci levels in general properly. Here we will not apply the advanced retracement method, because it’s not important in current context.

Pipruit: Ok, that’s interesting.​

Market respects 0.382 First, and then 0.618 and finally 0.786 - Forex School
Commander in Pips: In general the way of breakout and erasing of level by price has much in common with the same procedure on trend lines and support/resistance levels.

Commander in Pips: Let’s start from the chart that shows how market reacts on supports and how it looks, when some of support levels finally hold market:

Chart # 1 GBP/USD Weekly. Market has bounced from all levels, but 0.786 was a final support
Market has bounced from all levels, but 0.786 was a final support - Forex School
See – market respects 0.382 First, and then 0.618 and finally 0.786 that has held the market and was the basis for further up move.

Commander in Pips: But, as you understand, that will not happen any time. Sometimes, it could be without any respecting to any level, like it was during financial crisis in 2008:

Chart #2 GBP/USD Monthly – total crush of all Fibonacci support levels without any respect
Total crush of all Fibonacci support levels without any respect - Forex School
But this kind of crashes happens not too often. It needs really important extraordinary and unpredictable events to happen. The more common way of a breakout is as follows. Let’s assume, that you see an excellent thrust down, and you think that entering short in continuation of this move is rather nice idea.

But which one retracement level to choose for entering? May be 0.382?

Chart #3 EUR/USD Hourly. Do you want to enter short here?
which one retracement level to choose for entering? May be 0.382? - Forex School
Pipruit: Well, and why not? Retracement up looks nice – no strong thrusting move to the upside – rather gradual upward move. I think I’ll Sell there…​

Commander in Pips:
Well, let’s see, what happens then:

Chart #4 EUR/USD Hourly
Retracement up looks nice – no strong thrusting move to the upside – rather gradual upward move - Forex School
Pipruit: See, looks like I was right!​

Commander in Pips:
All traders think in this way first… But then – ooops! So, would you like to sell from 0.5 now?

All traders think in this way first. But then – ooops! So, would you like to sell from 0.5 now? - Forex School
Pipruit: Probably yes. Besides, as you’ve said – down move has already started…​

Commander in Pips:
Hm, it started from 0.382 also, but look what happened then..

Pipruit: Well, upside move is still gradual, so I think that I would like to sell from 0.5 also.​

Commander in Pips:
Ok, as you wish, your highness. Let’s see…:

Upside move is still gradual, so I think that I would like to sell from 0.5 also - Forex School
Pipruit: Oh, no. 0.5 has been broken also. But 0.618 as you’ve once said is a major level, so as 0.382. It should hold I believe it.​

Commander in Pips:
Probably yes…

What conclusions can we make from all these examples – not to use Fibonacci retracement, or what?​ - Forex School
…but no.

Although the market has respected almost each level – nevertheless, finally all of them have been erased by market price action - Forex School
Commander in Pips: Ok, I will not play mind games with you anymore. Here you can see, that although the market has respected almost each level – nevertheless, finally all of them have been erased by market price action.

Pipruit: Also, and what conclusions can we make from all these examples – not to use Fibonacci retracement, or what?​

Commander in Pips: Well, this is a radical way, that in fact could be applied, but I prefer another one. Our conclusions will have number of points:

1. Fibonacci levels should be just another tool in our technical arsenal, but it should not be just single one that we rely on;

2. As with trend lines, the support/resistance levels Fibonacci levels could fail and they do fail very often;

3. You should combine Fibonacci levels with other tools, that could increase the final probability of a successful outcome on each trade;

4. Still, the moment of respecting levels by price gives us important chance to success. It allows us to move stop order to breakeven point during the “respecting” move out from the level after the first touch. If you have done this all the time in our example – then you exited from the trades with no loss, even if you’re wrong!

5. Point 4 of our conclusion tells us, that to open position from Fibonacci levels is safer, than just from “nowhere”, because there is a solid probability exists that the market will respect it and allow us to move our stop loss order to breakeven point. Then, if we are proven wrong – it allows us to exit with no loss or even with small profit. That’s important.

6. Be careful with treating initial move out from some level as “continuation of initial thrusting move”, because it could be just a respecting of this level after the first touch. The point is that during the first touch the level is strong – that’s why the market could bounce from it initially. But the more often the market touches it, the weaker it becomes.

Pipruit: Cool. You’re right Commander. And what will happen if market disrespects levels?​

Commander in Pips: Well, in this case more probably you will take a loss on your stop order, but this will tell you, that market is stronger in this direction that it was seemed before – and will force you to wait for sometime or even avoid from trade in this direction.

Here is another example, by the way, why we’ve said that stop loss order is must. Just look at the last chart and imagine what could happened if you’ve entered short from 0.382 without stop loss order. Keep this always in mind…

The market is stronger in this direction that it was seemed before and will force you to wait for sometime - Forex School
Pipruit: Well, I think that I couldn’t sleep then…​

Comments

alshey
7 years ago,
Registered user
hello

thank you so much Sive...Godbless you...:)
Hamza Samiullah
2 years ago,
Registered user
Excellent..

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