With the Fibonacci retracement tool, you can improve how you trade Japanese candlestick setups.
The tool helps you to predict the levels in the market that can potentially act as a support or resistance level.
Derived from the ratios of the Fibonacci sequence, the retracement levels estimate the percentage of the preceding impulse that the pullback can get to before reversing.
When a pullback starts, attach the Fibonacci retracement tool to your chart, from the low to the high of the preceding impulse wave,
and then, look out for inside bar signals when the pullback reaches the 38.2%, 50%, and 61.8% levels, which are usually
the most significant levels.The patterns that occur at these levels are likely to reverse the price to the trend direction.
In the AUD USD chart above, you can see that the inside bar pattern occurred when the pullback got around the 61.8% Fibonacci level,
which acted as a support level. Afterward, the price reversed to the trend direction.
How to use the Fibonacci retracement in combination with candlestick patterns ? And inside bar as an example : The GBPUSD chart above shows a downtrend, with the Fibonacci levels acting as resistance levels.
Notice that an inside bar pattern formed around the 61.8% retracement level, and the price dropped afterward.