Fibonacci Retracements Explained How to Use This Technical Indicator


The retracement level can be used as a potential entry point in a trending market. While Fibonacci retracements can be useful, you should use them in conjunction with other indicators to corroborate your findings. Because the Fibonacci sequence and the golden ratio abound in nature, traders believe that they can also be used in the financial markets to predict price movements. Traders use the Fibonacci sequence and Golden Ratio for determining pullbacks and impulses on price charts.

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The chart above shows how to use Fibonacci retracement in an uptrend. The two points are the important high and low before the retracement. The price then retraces and bounces off the 61.8% (0.618) Fibonacci level to continue upward. Price does not move in a XLM straight line; it goes through a series of pullbacks, forming something like a zig-zag pattern. In an uptrend, for example, the price does not keep moving straight up; it moves upward and retraces before it continues the upwards movement.

How to use Fibonacci retracements in trading

One of the notable things in the sequence is the ratio between the numbers. Each number is approximately 1.618 times bigger than the preceding number. The term “golden ratio” is not only based on the sequence’s derivation but also because the ratio reflects in almost everything around us. Leonardo Fibonacci was a mathematician born in 1170 AD. From his work, we get the Fibonacci sequence of numbers, LTC and also the well-known Fibonacci golden ratio.

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Each number is the sum of the previous two numbers and is exactly 1.618 times bigger than the previous number. Access the futures market and trade with leverage on the most popular crypto exchanges such as Bitmex, ByBit, FTX, Binance, and KuCoin. The Fibonacci levels are %-based which means that even when you draw them differently, they will often line up correctly. In this article, I will explain how to correctly draw a Fibonacci sequence and how to use the Fibonacci extensions for your trading. Anyway, with all those numbers, you could put an elephant to sleep. The golden ratio can be found in geometry, art, architecture, and even on Sonic the Hedgehog.

How To Use Fibonacci And Fibonacci Extensions

Fibonacci levels also arise in other ways within technical analysis. For example, they are prevalent in Gartley patterns and Elliott Wave theory. After a significant price movement up or down, these forms of technical analysis find that reversals tend to occur close to certain Fibonacci levels. Finally, we get to the meat of our article, where we teach you about Fibonacci trading strategy.

As a means of identifying levels of support and resistance, Fibonacci retracements can be used to confirm suspicions of a market movement. Traders believe the Fibonacci series has its application in stock charts as it identified potential retracement levels. I would now define the move of 109 (380 – 489) as the Fibonacci upmove. As per the Fibonacci retracement theory, after the upmove one can anticipate a correction in the stock to last up to the Fibonacci ratios. For example, the first level up to which the stock can correct could be 23.6%. If this stock continues to correct further, the trader can watch out for the 38.2% and 61.8% levels.

It is called the “golden ratio” and traders often consider it as a major trend support/resistance level. When the price reaches one of these levels, we expect that either a trend continuation or reversal will occur. However, it’s always good to be familiar with the basic theory behind the Fibonacci technical analysis indicator so you can impress your mates (or dates?). But let’s see how you can actually use Fibonacci retracement levels in your forex trading.

How do you use Fibonacci retracement for beginners?

In order to find these Fibonacci retracement levels, you have to find the recent significant Swing Highs and Swings Lows. Then, for downtrends, click on the Swing High and drag the cursor to the most recent Swing Low. For uptrends, do the opposite.

First, open the app and put it in fullscreen mode for legibility purposes when reading Fibonacci levels crypto. But is Fibonacci retracement accurate and should you rely on swing high swing low Fibonacci in crypto trading? To answer this question, let’s first explain how to use the Fibonacci retracement in practice.

How To Use a Fibonacci Retracement Tool?

When retracement levels and moving averages coincide, the level of support or resistance is typically stronger. Unlike moving averages, Fibonacci retracements are fixed, making them easy to interpret. When combined with additional momentum indicators, Fibonacci retracements can be used to identify potential entry and exit points to trade on trending stocks. The first example shows how Fibonacci retracements can be used to identify multiple levels of support that can help predict the sawtooth pattern of an overall bullish movement. In this course, we are going to cover everything you need to know about Fibonacci retracement levels. Fibonacci retracements are a popular form of technical analysis used by traders in order to predict future potential prices in the financial markets.

Whenever using Fibonacci retracements, retracement levels should be interpreted cautiously and always in conjunction with additional indicators like MACD to confirm a reversal. Fibonacci retracements are somewhat similar to moving averages in that they can both be used to identify levels of support and resistance. However, the theories underlying these two indicators are entirely different.

For example, if the stock has run up from Rs.50 to Rs.100, it is likely to retrace back to probably Rs.70 before moving Rs.120. Chart 4 shows Pfizer bottoming near the 62% retracement level. Prior to this successful bounce, there was a failed bounce near the 50% retracement. The successful reversal occurred with a hammer on high volume and followed through with a breakout a few days later.

Retracement in Forex Trading

Any fib retracement explained involves combining different technical analysis approaches. In this case, the candle indicated by the blue arrow is aclassic pin-bar pattern, a reversal candle formation confirming a potential reversal. The stock market is characterized by rapid trend movements and small corrections up to 38.2%. It is better to use the Fibonacci extension here – it will help determine the target profit levels in a strong trend. The Fibonacci retracement levels show the approximate levels of the end of the Elliott trend waves. The instrument is not perfect and theory can be very different from practice.


We open the second trade at the moment of a rebound from the level of 0.382, and set take profit at around 0.236. After the second endpoint is locked, you can drag it horizontally to the right. This makes it more convenient to analyze the subsequent price movement within the colored zones of the indicator. Toggles the visibility and opacity for the background fill between the retracement’s levels.

The word ‘strong’ usage indicates the of conviction in the trade set up. The more confirming factors we use to study the trend and reversal, more robust is the signal. The same logic can also be applied for the short trade. After the down move, the stock attempted to bounce back retracing back to Rs.162, which is the 61.8% Fibonacci retracement level.

  • In the examples given above also it seems the prior uptrend / downtrend extending to large no. of days or even weeks for that matter.
  • Indicator description, settings, entry, and exit conditions.
  • If the market slides through that 50% retracement level, then traders will look to see if the market finally stops its decline when it has retraced 61.8% of the prior move.
  • The percentage retracements identify possible support or resistance areas, 23.6%, 38.2%, 50%, 61.8%, 100%.
  • If after exiting the level 61.8, stop loss was triggered, opening a trade on the next candle after a trend reversal towards the channel center.
  • In fact, it will often retrace to a Fibonacci retracement level, which can indicate an entry or exit point in the direction of the original trend.

This numerical sequence was known even in ancient India and used in metric sciences. Later, in the XII century, the Italian mathematician Leonardo of Pisa better known as Fibonacci formulated its properties. Click on the “Trade” button and select a trading instrument.

This reiterates that consistently making money trading stocks is not easy. Day Trading is a high risk activity and can result in the loss of your entire investment. After a period of consolidation, prices retested the 38.2% retracement level and broke to the next level which was the 50% retracement. The S&P 500 index then moved to test the 61.8% retracement level and has consolidated around that region.

At the beginning of the last uptrend, I decided to apply Fibonacci retracement levels based on the last high. The screenshot shows that the price moves within the ranges, pushing off from them in one direction or another. The chart shows that there are not five, but seven upward waves.

  • This is how the chart looks after selecting both points.
  • The grid can be strengthened using classic levels drawn by extreme values ​​at a small scale.
  • Fibonacci extensions are extremely helpful in determining price target objectives following a breakout.

Suppose, a stock is trending upwards, but it retraces to the Fibonacci level of 50% and resumes its upward journey. The trader can set a stop loss point just below the 50% level and enter the trade at this level. The risk in the trade would be low as compared to the profit potential because the trader is protected by a stop-loss order placed near the entry level. Therefore, at the key levels of resistance and support, there are zones of accumulation of orders that can be used to your advantage.

A swing low forms price reaches a new low relative to any preceding lows. Once price moves below a swing low and begins to retrace a new swing low has formed. A swing high forms when price reaches a new high relative to any preceding highs.

Even though deeper, the 61.8% retracement can be referred to as the golden retracement. If prices continue to trend through the 38.2% retracement they are likely to test the 61.8% retracement. You can also use Fibonacci Retracement levels in conjunction with other studies such as moving averages that can act as a confirmation indicator. These results are added to the low if you are measuring a decline, or subtracted from the high if you are measuring a rally. These levels will become your target resistance as the price is rebounding or support during a correction.

The 0.618 Fibonacci level acted as support for the price in the chart. Traders can use Fibonacci retracement patterns on any timeframe. However, they are more effective when viewed on longer timeframes, such as weekly or monthly charts. Conversely, in a downtrend, you could go short once the stock returns to its key resistance level (61.8% in the example below). Depending on the direction of the market, up or down, prices will often retrace a significant portion of the previous trend before resuming the move in the original direction.

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It can act as the first correction line for a new trend. Extend Lines Left/Right is an infinite extension of lines on the chart to the left / right. When using the Auto Fibonacci Retracement indicator, there is no need to explicitly set two points, as is done when using the Fib Retracement tool. In the visibility properties dialog, you can toggle displaying of the Fib Retracement on charts of different timeframes. Support LevelSupport level refers to a point in the securities trading below which the price of the security does not fall. Lastly, they have to multiply the resultant with a Fibonacci ratio or percentage and subtract it from or add it to the high or low price, depending on the trend.