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Many times I’ve seen a trader with one Fibonacci retracement tool on a small timeframe and wondering why price is not reaching a level or seemingly turning at a empty space on the charts. The reasoning for this is that Fib levels are traded from many different timeframes all at the same time and its best to know where all the higher timeframe levels are especially when trading from a small timeframe of 1 hour.

The object is to start from a higher timeframe here so that the trader can be aware of where the higher timeframe support and resistance levels are. In this example Ill set up a chart and make an analysis of each timeframe before stepping down to the next lower one. What this can do is help you to gain a perspective of price movement so that you can be prepared once price begins to move and you will not be at a loss as to why your trades do not work out.

In this example I'll use the EURUSD which is currently the most commonly traded pair and is easiest to trade. We want to start with the weekly and determine if there is trending in the markets and what direction is of that trend. First lets separate the chart into recent trending movements and ranging periods. Figure 1 depicts the ranging periods

Figure 1

Figure 2 is the same chart with the trending periods.

Figure 2

Simple, but I just want to make sure everyone understands the difference between ranging and trending.

The next step is to measure these movements with the Fibonacci retracement tool to mark the most likely retracement points once a trending movement is completed. In Figure 3 is an example of measuring a trending movement so we can see what the retracement points will be.

First before we apply the retracement tool, let’s determine the direction of the last trending movement. In figure 1 and 2 it's obvious that the trending movement is down and when we apply a retracement tool on price movement that is going down we are placing a resistance tool since the retracement levels will be above price they are where we expect price to meet resistance.

Figure 3

In Figure 3 we see that once the market began to retrace it tested the resistance levels of this downtrend and reached, actually it penetrated past the Long level or a 61.8% retracement level. It penetrated, but the level did not break since price closed back below this point, after meeting the resistance fib levels price began to retreat from there and a short entry is promted.

If we were to advance this methodology to the current movement we have, we see its still a down trending movement and the methodology works the same. In Figure 4 we advance out the tool to the current down trending movement and we have our current retracement levels to the current movement.

Figure 4

Now we can zoom in a little more to a smaller time frame and see how this applies to the current Daily chart. In Figure 5 the same chart is zoomed into the Daily timeframe and we want to see if we can improve our view or see if there is something different from the Daily waveforms that would make us want to move our retracement levels.

Figure 5

There are a few things we need to consider here and that if we look closer there are several daily waveforms; or stair step type moves that make up this weekly down trend. Most traders are not trading or not willing to trade this far a range where we are measuring roughly 2200 pips. The smaller waves or stair steps however are much more tradeable so we can get a little closer to price as long as we stay within the down trending view of the Weekly chart. In Figure 6 we move or advance the tool up the last point price has reacted to the resistance levels but has not completed by reaching the target levels of 138.2 and 161.8 (T1 and T2).

Figure 6

Now that we have this established we know our resistance levels to price and now we need to know the other side of the market or the support levels to this same movement. In Figure 7 we apply the support levels to this movement that has tested the resistance levels of the last leg of our down trend.

Figure 7

Now we have resistance and support levels to price but its kind of all jammed up and we cant really read this well since everything looks so close together. Now we can zoom in a little closer and well go to the 4 hour timeframe and see how our support and resistance levels to price look and check the price action or reaction to these levels. In Figure 8 we look into the 4 hour timeframe.

Figure 8

What we want to look for is what happens after the push up in price to test the resistance levels(the area highlighted by the grey box). On the 4 hour timeframe it appears price has broken resistance, but only on the smaller timeframe. On the daily it was only a penetration and the higher timeframe always out weighs what we see on the smaller time frames. The price action we see after the area of price in the grey box is ranging. Price is showing support at the lower levels of support but as price attempts to break long it is rejected by resistance levels. One or the other must break and a daily close across either ones levels is most likely the next direction price will take. This is the balance between a long and a short market.

We can now still go into a smaller or more zoomed in view of price from the 1 hour and look at the smaller movements in price to see how it reacts at the smaller timeframe levels. In Figure 9 we look at the 1 hour with these same levels applied with the addition of the resistance levels created during the day where price is rejected from the higher timeframe levels.

Figure 9

Keep in mind were only interested in what happens after the grey boxes. After the rejection from the higher timeframe, then the bounce from the higher timeframe support levels, the smaller timeframe levels come into play and a rejection occurs at the resistance levels from the 1 hour view. What’s key is what happens after we get a short signaled by the rejection of the red levels. From this one day price would be though of as short and if you did not know there were support levels below this you're left wondering why price isn’t continuing down. The higher time frame support levels are out weighing the the rejection from the 1 hour levels and price attempts to go back up again. This signals yet another reversal on the 1 hour, but what is in the way of price as it attempts to go long? Yes the resistance levels from the higher timeframes and now price is stuck in a battle over a long and short market. Clear signals are generated from the smaller 1 hour timeframe but the larger timeframe levels are keeping price in a ranging market.

If we look deeper at this movement now just as there are resistance levels to price, so will there be support levels to price. In Figure 10 we remove the higher timeframe levels so we can see more of what’s happening on the smaller 1 hour time frame. What we will find is the same battle over a long and short market.

Figure 10

The lesson here is never forget the higher timeframes! Everyone wants to trade from the smaller faster timeframes, but they end up unaware of what is going on from the higher timeframes and by not paying attention to them are missing why price reacts the way it does leading to losing trades because the higher timeframes always out-weight the smaller ones. Isn’t it in your best interest to know what goes on from the higher timeframes? The principles are the same the scale is just larger.

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If you have questions about this article you can ask them below or on the Fibonacci Trading Forum.