Another good tool to combine with the Fibonacci tool is trend line analysis. After all, Fibonacci levels work best when the market is
trending, so this makes a lot of sense!
Remember
that whenever a pair is in a downtrend or uptrend, traders use Fibonacci
retracement levels as a way to get in on the trend. So why not look for levels
where Fib levels line up right smack with the trend?
Here's a
1-hour chart of AUD/JPY. As you can see, price has been respecting a short term
rising trend line over the past couple of days.
You think
to yourself, "Hmm, that's a sweet uptrend right there. I wanna buy
AUD/JPY, even if it's just for a short term trade. I think I'll buy once the
pair hits the trend line again."
Before
you do that though, why don't you reach for your forex tool box and get that
Fibonacci tool out? Let's see if we can get a more exact entry price.
Here we
plotted the Fibonacci retracement levels by using the Swing low at 82.61 and
the Swing High at 83.84.
Notice
how the 50.0% and 61.8% Fib levels are intersected by the rising trend line.
Could
these levels serve as potential support levels? There's only one way to find
out!
Guess
what? The 61.8% Fib level held, as price bounced there before heading back up.
If you had set some orders at that level, you would have had a perfect entry!
A couple
of hours after touching the trend line, price zoomed up like Astroboy on Red
Bull, bursting through the Swing High.
Aren't
you glad you've got this in your forex toolbox now?
As you can see, it does pay to make use of the Fibonacci tool, even if you're planning to enter on a retest of the trend line. The combination of both a diagonal and a horizontal support or resistance level could mean that other traders are eying those levels as well.
Take note
though, as with other drawing tools, drawing trend lines can also get pretty
subjective.
You don't
know exactly how other traders are drawing them, but you can count on one thing
- that there's a trend!
If you
see that a trend is developing, you should be looking for ways to go long to
give you a better chance of a profitable trade. You can use the Fibonacci tool
to help you find potential entry points.
