No matter which Fibonacci trading tool you are using, it is best to add other indicators to your analysis. Every Fibonacci instrument, including Fibonacci retracements, relies on abstract and universally applicable mathematical formulas; very little data about the actual underlying asset is incorporated into these models.
Fibonacci retracements are used to identify support and resistance lines and trade breakouts, though they can also be used for stop-loss placements and countertrend target pricing. They are best complemented with other breakout indicators, momentum oscillators and volatility tools.
Bollinger Bands are a popular choice among Fibonacci traders because of their ability to confirm breakouts based on an asset's current trading range. Congestion from a Fibonacci retracement can be seen as particularly telling if the upper and lower Bollinger Bands have been contracting at the same time, confirming the likelihood of a breakout.
The moving average convergence divergence (MACD) is also a good fit with Fibonacci analysis. The MACD shows the relationship between two different moving averages. Traders use these two moving averages to spot crossovers, divergences or trends with significant momentum. Those who have a preferred stochastic oscillator for trend confirmation can employ those instead of the MACD.
The Fibonacci retracement strategy can play the support role in many different breakout trading systems, helping to identify natural exits or stop loss placements. These signals can be even stronger if the asset has some natural Fibonacci clusters around certain support or resistance lines.
Use simple volume measurements, such as advancing and declining stocks, with major indexes or exchanges. This helps you to differentiate between a normal post movement retracement and a possible reversal.