The next major problem that new traders have is that of where to draw their Fibonacci from in the first place. When you look at a price chart you will see that there are waves going in both directions on different timeframes, so how can you possibly know which wave to pick in order to draw your Fibonacci from?
Again, the solution is quite simple, it’s all about confluence.
With the retracements we look for a confluence to confirm our trading level or entry into the market this time we want a confluence of factors to confirm that we have the correct direction before we start plotting our ‘fibs’ and looking for a safe entry into the market.
To do this we could look to the higher timeframes and the market flow or price action in terms of higher highs and lows, so for example, if we have a higher timeframe market flow as up we would only be looking to draw our Fibonacci retracements on waves or moves that are heading up and the same for if you had price action indicating a possible long move by the market.
An ideal scenario is that you have both higher timeframe market flow and price action in agreement.
This way we have the overall direction in our favour plus we have the price action confirming this direction and finally we have a safe solid entry into the market in line with that overall, confirmed, direction.
Next: Extensions