Fibonacci levels are obtained by using higher highs or lower lows. A chart may have many higher highs/lower lows. Thus, Fibonacci levels can be obtained at different levels. A trader may find it difficult to spot out the levels where the price may react. In today’s lesson, we are going to see how different higher highs may lead us to having Fibonacci levels where the price does not react.
This is an H1 chart. The price heads towards the North with good bullish momentum before making a bearish correction. The point can be used to draw Fibonacci levels. The price then makes another bullish move and makes a new higher high. Some traders may want to use the last higher high to draw their Fibonacci levels. To make it clear, look at the chart below.
Some traders may use AB, while some others may use AC to draw Fibonacci levels. These two arms point out Fibonacci levels at different levels. Let us assume that we draw our Fibonacci levels by using AC.
The chart shows that the price after making the last higher high has started having a bearish correction. The buyers are to wait for the price to come at 78.6% level and make a breakout at the level of 100.0 to offer them a long entry. If the 78.6% is breached, 61.8% may do the same and offer them an entry as well. Let us proceed to the next chart to find out what happens next.
The price does not even come at 78.6%. It heads towards the North and makes a breakout at the level of 100.0. The price then never looks back. It hits the level of 161.8% in a hurry. The Fibonacci buyers do not find an entry here since the price does not trend from a 78.6% level. It trends way above the level of 78.6%.
Let us draw the Fibonacci levels with AB arm.
If we draw Fibonacci levels by using AB, we see that the price trends from 78.6% level. One candle breached through the level, but the next candle closes well above the level of 100.0. The buyers may set their target around 138.2% since it trends from 78.6%. However, it goes up to 161.8%.
To sum up the lesson, Fibonacci traders are to be well calculative at the time of selecting the first arm. With AC, there is no correction. The price trends towards the North straight. With AB, the price makes a correction and then makes another bullish move. Usually, a straight arm works well and provides accurate Fibonacci Fibonacci levels. Over here, we have seen that AB provides the Fibonacci levels, where the price reacts and help the buyers take a trading decision.