Trading with Fibonacci levels – Learn how to use this basic technical analysis method
Higher volatility and strong price swings in both directions are a threat for retail CFD traders who are not well-equipped with proper trading tools. An efficient trading strategy combined with advanced software can do the work, now that there is increased uncertainty related to the Omicron variant.
The popular Dow Jones Industrial Average finished 460 points lower recently after the first US Omicron case was reported, which is why traders should be on high alert since markets can be dampened by a single negative headline. However, efficient trading tools can work in any environment and today you’ll learn some basic things about using Fibonacci levels.
Alt-text: Fibonacci levels and online trading
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Fibonacci retracement
Prices can’t move up in a straight line, and corrections are a natural part of their activity. In such conditions, using Fibonacci retracement levels can help traders spot areas on the chart where buyers/sellers might accumulate to drive the price in the direction of the dominant trend.
For those who aren’t already familiar with this tool the popular Fib retracement levels are 23.6%, 38.2%, 61.8%, and 78.6%, while 50% is an unofficial level, but still used by many traders. These levels can be drawn in the popular MT5 platform or other trading software available in the market.
Once you spot a strong price move that starts to fade, simply attach the Fib levels by connecting the low and high of the initial move. The platform will show where the above-mentioned ratios are located on the chart.
Fibonacci extension
Traders can also use Fibonacci extension levels to spot points to which the original dominant trend might extend, once the correction is over. This is another powerful technical analysis tool, especially with stock market indices that have been trading for an extended period near or at record highs.
An uncharted terrain comes with unique challenges as traders can’t spot prior historical highs/lows, where support/resistance levels might be found. This flaw can be counteracted by the Fibonacci extension levels (61.8%, 100%, 161.8%, 200%, and 261.8%).
Pros and cons of Fib levels
On the bright side, Fibonacci levels are easy to use and learning how to integrate them into a trading strategy is convenient even for beginners. At the same time, traders have been using them for a long time and there are plenty of resources on the web.
There are also a few drawbacks that you should be aware of. One is that using Fib levels alone could result in a lower trading accuracy, especially in a choppy environment. As a result, traders need additional trading tools to back up all the signals generated by retracement or extension levels plotted on the chart.
Summary
Overall, Fibonacci levels represent a solid start for retail traders who want effective methods to anticipate price moves. You will also find these indicators within any popular platform, so there is no need to install additional features. Fib levels help you time the market correctly and place orders before there is an increased probability for the price to move impulsively in any direction.