Like we
said in the previous section, using Fibonacci levels can be very subjective.
However, there are ways that you can help tilt the odds in your favor.
While the
Fibonacci tool is extremely useful, it shouldn't be used all by its lonesome
self.
It's
kinda like comparing it to NBA superstar Kobe Bryant. Kobe is one of the
greatest basketball players of all time, but even he couldn't win those titles
by himself. He needs some backup.
Similarly,
the Fibonacci tool should be used in combination with other tools. In this
section, let's take what you've learned so far and try to combine them to help
us spot some sweet trade setups.
Are y'all
ready? Let's get this pip show on the road!
One of the best ways to use the Fibonacci tool is to spot
potential support and resistance levels
and see if they line up with Fibonacci retracement levels.
If Fib
levels are already support and resistance levels, and you combine them with
other price areas that a lot of other traders are watching, then the chances of
price bouncing from those areas are much higher.
Let's
look at an example of how you can combine support and resistance levels with
Fib levels. Below is a daily chart of USD/CHF.
As you
can see, it's been on an uptrend recently. Look at all those green candles! You
decide that you want to get in on this long USD/CHF bandwagon.
But the
question is, "When do you enter?" You bust out the Fibonacci tool,
using the low at 1.0132 on January 11 for the Swing Low and the high at 1.0899
on February 19 for the Swing High.
Now your chart
looks pretty sweet with all those Fib levels.
Now that
we have a framework to increase our probability of finding solid entry, we can
answer the question "Where should you enter?"
You look
back a little bit and you see that the 1.0510 price was good resistance level
in the past and it just happens to line up with the 50.0% Fib retracement
level. Now that it's broken, it could turn into support and be a good place to
buy.
If you
did set an order somewhere around the 50.0% Fib level, you'd be a pretty happy
camper!
There
would have been some pretty tense moments, especially on the second test of the
support level on April 1. Price tried to pierce through the support level, but
failed to close below it. Eventually, the pair broke past the Swing High and
resumed its uptrend.
You can do the same setup on a downtrend as well. The point is you should look for price levels that seem to have been areas of interest in the past. If you think about it, there's a higher chance that price will bounce from these levels.
Why?
First, as
we discussed in Grade 1, previous support or resistance levels would be good
areas to buy or sell because other traders will also be eyeing these levels
like a hawk.
Second,
since we know that a lot of traders also use the Fibonacci tool, they may be
looking to jump in on these Fib levels themselves.
With
traders looking at the same support and resistance levels, there's a good
chance that there are a ton of orders at those price levels.
While
there's no guarantee that price will bounce from those levels, at least you can
be more confident about your trade. After all, there is strength in numbers!
Remember
that trading is all about probabilities. If you stick to those higher
probability trades, then there's a better chance of coming out ahead in the
long run.
