Hello and welcome to another edition of the bulls vs the bears. Last week we touched on Combining Fibonacci Retracements with Trend Line Analysis. This week we are lighting Fibonacci Retracements with candlesticks. No, we are not doing a night vigil on the collapse of the forex market. Far from that. We are merely combining Fibonacci retracements with candlestick patterns – the Japanese variety.
Before we move on to today’s lesson. Let me give you a little tip. If you know you are a little rusty on reading candlesticks look up Fundamentals of Reading Candlestick Patterns and You Need To Know Ten of These Candlestick Patterns. Now onward.
Like I stated earlier, we are going to learn how to to combine the Fibonacci retracement tool with candlestick patterns. With this analysis we are looking for what we call in the forex business as exhaustion candles. Now exhaustion candles are called such not because they look worn out. But they reflect the level of buying and selling pressure among the big boys- not to mention the fact they reflect the indecision among traders as to whether to buy or sell. Also they give you an idea of where the next trend is going to come from.
Let’s take a look at a price action illustration using the 1 hour chart for the EUR/USD pair.
As you can see the the USD/CHF pair has been in a bullish mood for a while. Then all of a sudden the big players decide to take a break. I guess the burning question is ‘When should I get in on this trade?” Well let’s pull out the Fibonacci tool and see where it leads us.
As you can see the Swing High has been set at 1.3364 with the Swing Low at 1.2523. Now let’s see whether it’s safe to make our entry in the next chart
I guess it’s more than safe to make your grand entry. Evidently the bulls are shooting to the heavens. The 50.0 fib level held up for the bid with buyers pushing the EUR/USD pair further up the hill. Let’s see whether the 61.8 fib level was able to keep its shape.
Look what we’ve have here! The 61.8 level is doing just fine. Even better we find a doji sitting right on this barrier. In case you don’t know by now the the doji is an exhaustive candle reflecting indecision or equality among the bulls and bears. In light of this information the questions that should be running through your mind are : Are the bulls running out of steam? Is resistance holding at the retracement level? You need to answer these questions because other traders are also watching that level like a hawk.
You may also be thinking “Is it time to sell”? The chances of a reversal are quite high. Just make sure you have a risk management plan in place just in case the market decides to head south. The next chart should answer all these questions for us.
As you can see it’s definitely time to put in a sell order. Why? because the doji has formed, meaning the buyers are worn out from battling the sellers. So get ready to make some serious doe!
However, the bears stall for a bit. But not for long because they then head straight down the slope after the brief respite. Obviously the bulls were too tired to lock horns with the bears, which then allowed the bears to seize the initiative. Eventually price nose-dives all the way down to the Swing Low. The bears then racked up 500 pips along the way – A candidate for trade of the year if you ask me.
If you want to learn more about swing trades look up Do A Little Swing Trading
So as you can see the Fibonacci tool is very useful in signalling whether a retracement level will keep its shape or not. Even better you don’t need to put in those scary entries called limit orders. There are no grey areas with Fibonacci tools. Of course you may start getting nervous about whether the support levels will keep their shape since we are dealing with event zones and not necessarily specific levels. This is where your knowledge of candlestick formations come in real handy.
Just wait for the Fibonacci bar to form below or above a Fibonacci level to confirm whether you should put in an order or not. If you see fibonacci the bar forming go ahead and put in your trade order since that’s your cue that the retracement level is holding.
That’s a wrap for ”Lighting Fibonacci Retracements With Candlesticks ” Next week we’ll learn How to use Fibonacci Extensions to Rack Up Profits.”
Til next time take care
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