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Writer's pictureK9 Investments
6 days ago4 min read

Using Fibonacci Retracement with Candlestick Patterns for Effective Trading

Updated: 5 days ago


Level-3 Module-3 Chapter-6


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Understanding Fibonacci Retracement

The Fibonacci retracement tool is a popular method for identifying potential support and resistance levels in a market. It uses horizontal lines to indicate areas of support or resistance at the key Fibonacci levels before the price continues in the original direction. The main Fibonacci levels used in trading are 23.6%, 38.2%, 50%, 61.8%, and 100%. By identifying these levels, traders can anticipate potential price reversals or continuations.


Candlestick Patterns and Exhaustion

When you combine Fibonacci retracement with candlestick patterns, you are primarily looking for signals of exhaustion in buying or selling pressure. Recognizing when this exhaustion occurs can give you clues about when the price might continue its trend. At K9 Investments Trading, we refer to these helpful candlesticks as Fibonacci Candlesticks or simply Fib Sticks.


Identifying Trading Opportunities

Let's take a look at a practical example using the EUR/USD currency pair on a 1-hour chart. Suppose the pair has been trending downwards for the past week, but the movement seems to be pausing. Traders often ask themselves.


To analyze this situation, you would set your swing high and swing low. For example, let’s say your swing high is at 1.3364 on March 3, and your swing low is at 1.2523 on March 6. As it’s Friday, you might decide to take an early break and wait until you review the charts after the weekend.


You notice that the price has retraced and reached the 50.0% Fibonacci level, which held temporarily before buyers pushed the price higher. However, you decide to remain cautious and wait to see if the 61.8% level holds, especially since the last candlestick was quite bullish.


Recognizing Exhaustion with Fib Sticks

Suddenly, a long-legged doji appears right on the 61.8% Fibonacci retracement level. If you’ve been paying attention in your trading education, you’ll recognize this as an exhaustive candle. The question arises: is the resistance at the Fibonacci level holding? It’s a strong possibility.


Since other traders are likely monitoring the same Fibonacci level, you might consider shorting at this point. While you can never predict market movements with absolute certainty, the probability of a reversal appears quite favorable. If you had shorted immediately after the doji formation, you could have made impressive profits.


Following the doji, the price stagnated for a short while before plunging downward, confirming that buyer exhaustion allowed sellers to regain control. This move could have resulted in a profit of about 500 pips as the price retraced back to the swing low.


Advantages of Using Fib Sticks

The beauty of using Fib Sticks is their ability to signal whether a Fibonacci retracement level will hold. If the price stalls at a Fibonacci level, it suggests that other traders may have placed orders at these significant levels.


Additionally, you don’t necessarily need to place limit orders at the Fibonacci levels. Instead, you can wait for a Fib Stick to form just above or below a Fibonacci retracement level. This additional confirmation can strengthen your decision to place an order.


If a Fib Stick does form, you can confidently enter a trade at the market price, as you now have further confirmation that this level might hold.


Final Thoughts

Combining Fibonacci retracement with candlestick analysis can lead to more strategic trading decisions and improved outcomes. For anyone looking to enhance their trading skills, this approach is invaluable.


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Conclusion

Using Fibonacci retracement with candlestick patterns is a powerful trading strategy that can significantly enhance your trading approach. By recognizing key candlestick formations, particularly Fib Sticks, and understanding the context of Fibonacci levels, you can better identify potential trading opportunities and manage your risk effectively.


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3. What is the importance of using Fibonacci levels in trading?

Fibonacci levels help traders identify potential support and resistance zones, which can be crucial for making informed trading decisions. By using Fibonacci retracement in conjunction with candlestick patterns, traders can improve their entry and exit strategies.


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5. What are the key benefits of using candlestick patterns in trading?

Candlestick patterns provide valuable insights into market sentiment and potential reversals. By recognizing these patterns in conjunction with Fibonacci levels, traders can better assess market dynamics.


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7.How much money is traded daily on the Forex market?

Approximately $6.6 trillion is traded daily on the Forex market, making it the largest and most liquid financial market in the world.

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