Well, seeing as how Fibonacci levels are used to find support and resistance levels, this also applies to Fibonacci!
Fibonacci retracements do NOT always work! They are not foolproof.
Let’s go through an example of when the Fibonacci retracement tool fails.
Below is a 4-hour chart of GBP/USD.
Here, you see the pair has been in a downtrend, so you took out your Fibonacci retracement tool to help you spot a good entry point.
You use the Swing High at 1.5383, with a swing low at 1.4799.
Then, the pair has been stalling at the 50.0% level for the past couple of candles.
You say to yourself, “Oh man, that 50.0% Fib level! It’s holding, baby!
Time to short this sucker!”
You short at market and start daydreaming that you’ll be driving down Rodeo Drive in your new Maserati with Scarlett Johansson (or if you’re a lady trader, Ryan Gosling) in the passenger seat…
Now, if you really did put an order at that level, not only would your dreams go up in smoke, but your account would take a serious hit if you didn’t manage your risk properly!
Take a look at what happened.
It turns out that the Swing Low was the bottom of the downtrend and the price rallied above the Swing High point.