(Why we shouldn’t buy breakouts):
Thomas Long, FX Power Course Instructor
The FX-market oscillates on a regular basis between range bound and trending markets. In range bound market conditions, traders typically adopt a simple buy low, sell high approach, where as trending market climates call for traders to trade with the trend. However detecting whether the market is currently in a range bound or trending environment can be tricky, and costly if applied inaccurately. With that said, the Fibonacci levels can provide a valuable insight to the current market climate and the appropriate trading approach.
The first chart below shows a significant rally to the upside, as the trend reversed direction, the market then passed through all 3-commonly used Fibonacci levels; 38.2%, 50%, & 61.8%. Due to the fact that not one of our Fibonacci levels established our new support, we can extrapolate that a trend is not probable. It is important to keep in mind that trends exist when there is an uneven distribution of buyers and sellers, forcing the market to new high/low prices. However due to the fact that the market fell back below every Fibonacci line, indicates that the buyers were not in fact in control of the marketplace. Finally note how the market then accomplished a ‘slightly’ new low before reversing once again back to the upside. If we were to sell short the market at its slightly new low price, we would have certainly exited the trade at a loss.
