Analysis of errors
There are certain common errors that traders can make when they are using the analysis of Fibonacci.
- The first most common mistake that is made when traders use Fibonacci retracements is to start the range in the wrong direction. For example, if you want to find supports, you should start from high prices and go down, and the opposite process to find resistances. Also, when you select the high price and low price for the range, you should be sure that the confluence or support area is below the current price that closes the market, otherwise you would be finding a support which the market has already broken in the past.
If you use the Fibonacci tool like in the graph above to find supports, you will not have the correct supports or confluence zones and the market will be able to easily break these levels in the future because the market does not consider them important. The trader should find important levels of the market but levels that serve to project the future behavior of the market.
The graph above is taken on the EUR/USD. If you use the tool from high prices to bottom to find resistances, the analysis will be carried out erroneously and these supposed resistances will not be, and the market will continue its rally. This would be a costly mistake because the stop loss zone will be activated removing the trader from the market.
- Do not use high or low prices for ranges that have been reached by recent oscillations, because if this is done, the market will have exceeded the Fibonacci levels and this means that the market will have broken zones of resistances or supports so that the market could do it again.
In these graphs can be observed that if high prices are in a range that has been touched by the market recently at some point, the market will break the resistance and the trade will be closed by a bad analysis running the point of stop loss.
- Another common error is to make the ranges for Fibonacci retracements, but without a fixed point. For example, each range has an initial and final point different from each other, so the confluence areas will not be the right ones or there will not even be confluence zones so many people could say that the Fibonacci-based analyses do not serve, but they don’t realize that the exercise is wrong. Below are two graphs that show this problem and why it will lead to erroneous conclusions.
As seen in the graphs, if this were done, the trader would have areas of support and resistance that the market does not respect because it is not a true level so the trader will assume erroneous levels and will not be managing the risks adequately. To finish, it is important to mention that like all the tools, those that use the Fibonacci series can fail in some cases, where the market does not respect areas that the market should and continues its path without rebounding. But by using these tools, most of the time it will be managing the risk correctly and dramatically increase the chances of performing winning trades, so it is important to use all the tools mentioned to confirm that the market signals are correct.