4.19 Complementing Fibonacci Retracements with Supports and Resistances

Like any other technical indicator, Fibonacci retracements could  sometimes fail, and hence it is always better to confirm Fibonacci readings with other tools of technical analysis.

Confirmation with other tools helps to stack the risk-reward ratio in your favor. After all, in the long run, trading is a probability game. It’s all about restricting your losing trades and having more winning trades.

That said, which tool should we line up alongside our Fibonacci friend? A very good confirmatory method is to use possible support and resistance levels with Fib retracements.

Why does this work? It’s because known support and resistance levels are places where a lot of trading can be expected and when these line up with Fib retracement targets, you can bet that the price is likely to go your way. So you’re improving your chances of making a winning trade!

Let’s look at a couple of charts and see how this works:

Example during a downtrend

OK, so the pair had a strong up move and you want a piece of the action, but don’t know when to jump in. So, as usual, you took Mr. Fib’s help and up came the Fib retracement levels.

But you’re in a quandary – should you buy at the 0.382, 0.500, or 0.618 levels? What if you bought and the price just went through and down?

Fair questions! So, let’s look around for more evidence, and specifically, tracks left by previous bulls or bears. I mean areas that worked as support and resistance in the past and are likely to do so again.

Looking back one can easily spot a previous price peak at 1.0510, an earlier resistance. The current up trend took out this resistance, so it will very likely now function as a support.

Let’s just draw a horizontal line from this peak and see if its level also matches up with any Fib level. Voila! It’s almost a dead ringer for the 0.500 level. This is therefore a support area and a buying level with a good chance that the price will bounce off it in the direction of the earlier move.

This is exactly what happened. Confirmation certainly helps.

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