Fibonacci Retracement is one of the most popular technical indicators used by traders to predict market movement. It allows you to identify the reversal areas that help you determine the potential entry and exit points after a pullback.
It is very common to mistakenly use this indicator and lose your chances of making a profit. Read this article to learn about mistakes so that you won’t repeat them in your trading career. Also, you have to accurately learn technical analysis in order to increase your chances of not making any minor or major mistakes.
5 Common Mistakes to Avoid When Using Fibonacci Retracement
Here are five common mistakes that you should avoid while using the Fibonacci retracement:
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1. Mixing Reference Points
While applying Fibonacci retracement to the price action, you must maintain consistency within your reference points. This means that when you refer to the lowest price of the trend, considering the close of a session or the body of the candle, the best price available within the body of the candle should be at the top of the trend. It should be candle body to candle body, wick to wick.
However, mixing the reference points, like moving from a candle wick to a candle body, leads you to have incorrect analysis and error.
2. Ignoring Long-Term Trends
Oftentimes, newbie or beginner traders make the mistake of measuring significant moves and pulling back in the short term without focusing on the longer trend. Short-term traders commit this mistake due to their narrow perspective.
However, a trader can potentially apply the Fibonacci retracement in the right direction of momentum by keeping tabs on long-term trends. This will open up greater opportunities.
3. Using Fibonacci Retracement as a Standalone Tool
One of the common mistakes to avoid while using Fibonacci retracement is completely relying upon it. You should use these retracement levels along with other technical indicators, as no technical indicator serves 100% accuracy.
You can approach MACD or stochastic oscillators along this indicator to increase the chances of a good trade.
4. Relying on Short-Term Trends
Day trading has a lot of volatility, which makes the Fibonacci retracements less effective in a shorter time frame, as compared to the longer timeframes. In simple words, taking short timeframes reduces the efficiency of indicators.
Volatility skews up the support and resistance level, which makes it difficult for traders to choose what levels can be traded. Spikes and whipsaws are commonly seen in the short term due to the high volatility of retracement levels.
You can not even set a stop-loss on trades while using the retracement levels for short timeframes. Therefore, booking profits through this approach becomes very difficult.
5. Not Utilizing Stop-Loss Order
Last but not least, another common mistake made by traders is not implementing the stop-loss orders while trading with Fibonacci retracement levels.
A stop-loss order is basically an order given to a system to automatically sell the assets when the price drops below the current market prices. Simply put, a stop-loss order allows you to limit your losses when the market turns around.
To Wrap Up!
These are the five common mistakes that a trader must avoid while using the Fibonacci retracement. Ensure that you do not repeat these mistakes while making your trades, and it will allow you to make a good profit. Also, you should enroll in the course on technical analysis from Upsurge.club, which will enable you to successfully use this technical indicator.