4.21 Complementing Fibonacci Retracement with Candlestick Reversal Patterns

 

We need all the help we can get when taking on our very own Goliath, the Forex market. Previously we saw how we enhanced the results from our Fibonacci retracements sniper gun by adding night vision glasses such as ‘Support and Resistance’ and ‘Trend Lines’, and hit pay dirt.

 

Well, this time we’ll blind date Mr. Fib with Ms Candles and see what happens! Will the sparks fly, and will they get on? Let’s find out!

 

Basically we want to confirm Fibonacci retracement levels with candlestick chart patterns that indicate whether the support or resistance level is holding or likely to break.

 

You need to keep a watch to see is a candlestick reversal pattern is emerging near a Fibonacci level, during a consolidation, to indicate that the consolidation might be over. Keep an eye on the quick guide to the candlestick patterns but for your ready reference, following are the patterns to look for:

 

Japanese candlesticks reversal patterns to support Fibonacci levels.

 

In the Forex chart below we identified a nice uptrend when EUR/USD went up from 1.3105 to 1.3833 and used its swing high and low to construct the Fib levels marked in red horizontal lines. Weren’t you wishing you had a nice long trade tucked in there, somewhere? Well, maybe we still can by waiting for a consolidation towards Fibonacci levels. Let’s see if the price behavior around the Fibonacci retracement levels gives us a clue to the entry point – we’ll do this watching for any significant candle patterns that can confirm the Fibonacci levels.

 

Use of the combination of Fibonacci retracements and candlestick reversal patterns on a Forex chart.

 

We see that the price moved up sharply after stalling near the 76.4% support level, with one bullish, elongated hammer candle, followed by a candle representing an approximation of the neutral spinning tops, which indicate uncertainty, and finally another small hammer. 

 

It looks like the bulls have stymied the bulls and turned the clock back just a bit! But wait, there’s more to follow. The next candle is a bullish one reaching well above the mid-way of the spinning tops and then another long bullish candle. The complete set of these candles indicate that the bulls are now in the driver’s seat. 

 

So there you have it – the candlesticks just confirmed the support offered by the 76.4% fib retracement level. The pair is crying out for a long trade and, of course, this is what you were looking for – a good entry into the original bullish trend. As you can see the price jumped up. This chat is not showing the complete price-action but ultimately the price had gone as high as 1.3994 after finding the mentioned support near 1.3300. Some nice pips on the long there!

 

We enhanced our trading by using two technical tools confirming each other. That the fib retracement level was working was clearly demonstrated by the powerful candle formation. These kinds of confirmations provide trade opportunities with great risk-reward ratios – grab them with open arms, and orders at the market price.

 

   

 

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