If you've been paying attention in class, you'd know by now that
you can combine the Fibonacci tool with support and resistance levels
and trend
lines to create
a simple but super awesome trading strategy.
But we ain't done yet! In this lesson, we're going to teach you
how to combine the Fibonacci tool with your knowledge of Japanese candlestick
patterns that you
learned in Grade 2.
In
combining the Fibonacci tool with candlestick patterns, we are actually looking
for exhaustive candlesticks. If you can tell when buying or selling pressure is
exhausted, it can give you a clue of when price may continue trending.
We here
at BabyPips.com like to call them "Fibonacci Candlesticks," or
"Fib Sticks" for short. Pretty catchy, eh? Let's take a look at an
example to make this clearer.
Below is
a 1-hour chart of EUR/USD.
The pair
seems to have been in a downtrend the past week, but the move seems to have
paused for a bit. Will there be a chance to get in on this downtrend? You know
what this means. It's time to take the Fibonacci tool and get to work!
As you
can see from the chart, we've set our Swing High at 1.3364 on March 3, with the
Swing Low at 1.2523 on March 6.
Since
it's a Friday, you decided to just chill out, take an early day off, and decide
when you wanna enter once you see the charts after the weekend.
Whoa! By
the time you popped open your charts, you see that EUR/USD has shot up quite a
bit from its Friday closing price.
While the
50.0% Fib level held for a bit, buyers eventually took the pair higher. You
decide to wait and see whether the 61.8% Fib level holds. After all, the last
candle was pretty bullish! Who knows, price just might keep shooting up!
Well,
will you look at that? A long legged doji has formed right smack on the 61.8% Fib
level. If you paid attention in Grade 2, you'd know that this is an
"exhaustive candle." Has buying pressure died down? Is resistance at
the Fib level holding? It's possible. Other traders were probably eyeing that
Fib level as well.
Is it
time to short? You can never know for sure (which is why risk management is so
important), but the probability of a reversal looks pretty darn good!
If you had shorted right after that doji had
formed, you could have made some serious profits. Right after the doji, price
stalled for a bit before heading straight down. Take a look at all those red
candles!
It seems
that buyers were indeed pretty tired, which allowed sellers to jump back in and
take control. Eventually, price went all the way back down to the Swing Low.
That was a move of about 500 pips! That could've been your trade of the year!
Looking for "Fib Sticks" can be really useful, as they can signal whether a Fib level will hold.
If it
seems that price is stalling on a Fib level, chances are that other traders may
have put some orders at those levels. This would act as more confirmation that
there is indeed some resistance or support at that price.
Another
nice thing about Fib Sticks is that you don't need to place limit orders at the
Fib levels. You may have some concerns whether the support or resistance will
hold since we are looking at a "zone" and not necessarily specific
levels.
This is
where you can use your knowledge of candlestick formations.
You could
wait for a Fib Stick to form right below or above a Fib level to give you more
confirmation on whether you should put in an order.
If a Fib
stick does form, you can just enter a trade at market price since you now have
more confirmation that level could be holding.
