Part V. Combination of Fibonacci levels with other lines

Commander in Pips:
I always tell you that it’s necessary to combine one tool with another one to get greater probability of success. Well, today we will take a look how Fibonacci levels could be joined with other tools that we’ve already studied – trend lines and/or support/resistance levels. This part will be much simpler than previous ones, so enjoy.

Pipruit: Finally, some rest for my brain.​

Combination of Fibonacci levels with support/resistance levels

Commander in Pips:
First, let’s take a look at this combination. Here is the chart – this is daily EUR/USD chart. Tell, me, what you see here.

Chart #1 Daily EUR/USD
Pipruit: Me again? Commander, you’ve promised that I will take a rest… But it was stupid to count on something like rest, when dealing with you…​

Commander in Pips: Stop grumbling and answer the question, if you do not want to clean every dish in the mess hall tonight…

Pipruit: No, Sir. I’d better answer. You show an excellent chart and made very helpful notes there. So, we have obvious resistance area around 1.3430-1.3450 that was broken by strong thrust up move. Now market turns to retracement down.​

Commander in Pips: That’s right. Also take a look – I’ve marked also a nice example of Wash&Rinse/Stop Licking pattern. See – the market has pierced the 1.3430 resistance and cleared out all the stop orders that had been placed there. It didn’t close above this area. Then it has continued move down. By the way, what is this candle pattern called – right under my arrow note?

Pipruit: Indeed. It is very helpful to see on real example, how W&R should look like. Because if you do not know it, then it will be difficult to recognize it all alone. This is a shooting star, Sir.​

Commander in Pips: Right. So, go on.

Pipruit: Well, as you already have given me the prompt, I see that 1.3430-1.3480 area is very close to 0.382 Fib support from swing up at 1.3479. So, according to the properties of support/resistance lines, that they change their qualities after breakout to the opposite side – 1.3430-1.3480 area will now act as a support now. Hence, the probability that the market will hold above this area is stronger than above just a Fibonacci level.​

Commander in Pips: That’s right. So, let’s see what has happened then:

Chart #2 EUR/USD Daily
Pipruit: Cool! The low of the market in this area was just a bit lower than 1.3430.​

Commander in Pips: Now I think you understand why we should not rely only on some single tool –no matter how strong it is. Fibonacci retracement is powerful and tremendous tool, but Fibonacci plus support/resistance is better.

Pipruit: Yes, I see it. It looks like how it works in any sports team. The superstar player, no matter how superb he or she is, will not win the game alone in basketball, football or a hockey match.​

Commander in Pips: You’re absolutely right – nice comparison. Say, let’s assume that market has not held above this area and broke it down. What this possible scenario could tell you?

Pipruit: Hm. In this case I will be very careful to Buy from other levels, or even will not Buy at all. Because if market has broken the combination of Fib support plus the ordinary support line – in fact it moved below the previous highs – this tells us how weak it is. And the probability is shallow that other Fib levels could hold it, when even a combination was not able to do that.​

Commander in Pips: Right again! In such cases we should be extra careful to establish any position against the market. And can you explain the market mechanics of this combination. Why is it safer way to enter long?

Pipruit: This is not too difficult. First of all, many traders after such a strong move up and breakout of previous resistance level will be watching for the possibility to get onboard. But different traders could use different tools – some of them will be watching only at support area, that was a resistance first, others will look at Fibonacci levels. Maybe someone will be watching at both. So, all of them will estimate that this area 1.3430-1.35 is rather strong support and will place their Buy orders there. Hence there will accumulate a double amount of Buy orders – those who want to buy from ordinary support plus those who want to do it from 0.382 Fibonacci support. Because of that, this level will be much more difficult to break through. So, it’s stronger then and to buy from there is safer. The probability that the market will reestablish up move from this area also is greater.​

Commander in Pips: Good. Also the same combination you can apply in opposite direction. This will be a combination of Fibonacci and ordinary resistance levels.

Combination of Fibonacci levels with a Trend line

All the same is about trend lines. The same rules, market mechanics and others items that we’ve just discussed. The major difference is that trend line has a slope and depending from time, it could coincide with different Fibonacci levels. But let’s see how it looks like on a picture. Tell me, what you see here:

Chart #3 EUR/USD hourly
Pipruit: The market is showing a nice move up, although this is not a perfect thrust. Now it has paused and maybe will show retracement down. So, here we can apply Fibonacci retracement levels to enter long. Also I see the trend line that is rather deep from current market action. I do not know if would I wait for deeper retracement or enter from 0.382, for example. But taking into consideration that thrust is not very impressive – the 0.618 or even deeper retracement is probable.​

Commander in Pips: Nice analysis. Especially I like the last part about strength of thrust and depth of retracement. So, I think that you’ve understand already, that the area of crossing trend line and Fibonacci level is stronger and is safer for a potential buy trade. See what has happened:

Chart #4 EUR/USD hourly
Commander in Pips: The market mechanics and explanation of this combination is the same as with ordinary support/resistance levels. As a conclusion, I say that you may combine both horizontal and diagonal lines with Fibonacci retracement and treat their coincidence or crossing as a stronger area.

Pipruit: And could we use coincidence or all three types of lines?​

Commander in Pips: Well, if it will happen somewhere – sure we could.

And very important notification at the end of this part:

While combination of Fib levels with trend lines and/or with ordinary support/resistance levels attracts more traders’ attention and makes these levels stronger – the same reason makes these levels very sweet for market-makers, who like to trigger orders around them. Take a note, that appearance such patterns as Stop Licking and different kind of failed breakouts around these areas are more probable.

F
FOREXHAWK
12 years ago,
Registered user
Hi Sive.

I have a problem even when I use fibs candles etc on larger time frames In my demo accounts soon as I place a trade the intraday movements go crazy and I am always stopped out by the smallest time frames whiich can be very eratic. How can I overcome this problem. Do I use larger stops based upon the support and resistance on intraday/10 second, 1 min charts or what.

Accepting nothing is foolproof
I would be very grateful if you could guide me on this matter.

Thank you
Wildblood Hawk
Sive Morten
12 years ago,
Registered user
> Hi Sive.

I have a problem even when I use fibs candles etc on larger time frames In my demo accounts soon as I place a trade the intraday movements go crazy and I am always stopped out by the small..

Hi Hawk.
Stop placing procedure is very wide topic and contains a lot of important issues, but let's dicsuss the common rules.
1. First, your stop should correspond with your target and context. For instance, if you trade on daily time frame and enter, say, long, based on daily trend by MACD with some target, based on Fib extension. You can't place stop on 5-min chart just 20 pips lower, because move 20 pips against you will not cancel your trading foundation. That's what I mean with "correspond"

2. Stop has to be placed in an area, that will cancel your context for trading, if market will reach it. Simple example - let's suppose that your context is MACD trend and you enter long from some Fib support. You have to place stop so, that it will be triggered only if trend will turn bearish - i.e. your context for trade will be vanished and you will be wrong. If you place stop tighter - then you could be stopped-out, but your context for trade still intact.

3. Risk-reward. When you plan some trade, you have decide where you will place stop first, and where to enter - second. Risk/reward ratio should not be less than 1.0.
4. Do not risk more than 2% from your total assets in single trade.

Other issues depend your trading strategy, style and other specific and personal moments.
if you want to find mistakes - welcome to my forum education page. You can post your analysis there and all participants discuss it and together we will find out what you do wrong.
Hamza Samiullah
6 years ago,
Registered user
nice explanation...