Fibonacci Retracements – How to Use Fibonacci Retracement | CFI
Fibonacci retracement definition and uses in trading

Fibonacci retracements

What are Fibonacci Numbers?

Leonardo Fibonacci was a mathematician born in 1170 AD. From his work, we get the Fibonacci sequence of numbers and the well-known Fibonacci golden ratio. The Fibonacci sequence is a series of numbers where the next number is simply the sum of the two preceding numbers. So, for example, it would run 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, and so on, with the sequence continuing indefinitely.

 

What Are Fibonacci Retracement Levels?

Fibonacci retracement levels stemming from the Fibonacci sequence are horizontal lines that indicate where support and resistance are likely to occur.

 

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987... with the string continuing indefinitely. The Fibonacci retracement levels are all derived from this number string. After the sequence gets going, dividing one number by the next number yields 0.618, or 61.8%. Divide a number by the second number to its right, and the result is 0.382 or 38.2%. All the ratios, except for 50% (since it is not an official Fibonacci number), are based on some mathematical calculation involving this number string.

How prices Move in the Market?

Price does not move in a straight line but instead in a zigzag way. It moves strongly in one direction and corrects some of that movement in the opposite direction, as shown in (Figure 1)

Price chart movement in a zigzag way

Figure 1 - Analytical Trading

Please click For bigger size

×
 

 

Why We use Fibonacci Retracement levels?

We Use Fibonacci Retracement levels to expect when these price corrections will end, and buyers will enter the market in the uptrend, or sellers will enter the market in the downtrend, as shown in figures (2) and (3).

 

Buyers entering the market in the uptrend

Figure 2 - Analytical Trading

Please click For bigger size

×
 
Sellers entering the market in the downtrend

Figure 3 - Analytical Trading

Please click For bigger size

×
 

 

How to draw Fibonacci Retracement levels?

In the uptrend, we draw retracement from major trough to major peak, as shown in figure (4), and in the downtrend, we draw from major peak to major trough, as shown in figure (5).

 

Uptrend retracement level

Figure 4 - Analytical Trading

Please click For bigger size

×
 
Downtrend retracement level

Figure 5 - Analytical Trading

Please click For bigger size

×
 

 

How to use Fibonacci retracement in trading?

Fibonacci retracement lines are often used as part of trend-trading strategies. If a retracement is taking place within a trend, you could use the Fibonacci levels to place a trade in the direction of the underlying trend. The idea is that there is a higher chance a security’s price will bounce from the Fibonacci level back in the direction of the initial trend. By plotting Fibonacci ratios such as 61.8%, 38.2%, and 23.6% on a chart, traders may identify possible retracement levels and enter potential trading positions.

 

How to use Fibonacci retracement in uptrend?

During an uptrend, buyers have total control over prices, and prices make higher highs and higher lows. When prices form a higher high, some traders begin to make some profit from their winning positions, forcing prices to decline and move downward. This movement is called a correction. The trader will wait for any reversal candlestick pattern around any Fibonacci retracement levels to buy again during the uptrend, as shown in figure (6) and figure (7).

 

Fibonacci retracement in uptrend

Figure 6 - Analytical Trading

Please click For bigger size

×
 
Fibonacci retracement in uptrend

Figure 7 - Analytical Trading

Please click For bigger size

×
 

 

 

How to use Fibonacci retracement in a downtrend?

During downtrends, sellers have total control over prices, and prices make lower highs and lower lows. When prices form a lower low, some traders begin to make some profit for their winning positions that force prices to rise and move upward. This movement is called an upward correction. The trader will wait for any reversal candlestick pattern around any Fibonacci retracement levels to sell again during the current downtrend, as shown in figures (8) and figure (9).

 

Fibonacci retracement in a downtrend

Figure 8 - Analytical Trading

Please click For bigger size

×
 
Fibonacci retracement in a downtrend

Figure 9 - Analytical Trading

Please click For bigger size

×
 

 

Limitations of Using Fibonacci Retracement Levels

While the retracement levels indicate where the price might find support or resistance, there are no assurances the price will actually stop there. This is why other confirmation signals are often used, such as the price starting to bounce off the level.

 

The other argument against Fibonacci retracement levels is that there are so many of them that the price is likely to reverse near one of them quite often. The problem is that traders struggle to know which one will be useful at any particular time. When it doesn't work out, it can always be claimed that the trader should have been looking at another Fibonacci retracement level instead.

 

Conclusion

Fibonacci retracements are useful tools that help traders identify support and resistance levels, but traders must use other technical tools with them to make a better trading decision.

 

The content published above has been prepared by CFI for informational purposes only and should not be considered investment advice. Any view expressed does not constitute a personal recommendation or solicitation to buy or sell. The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI. Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.

Tags:

Important Disclaimer:


We would like to remind that while we endeavour to provide best possible services, CFI provides execution only services and any information, reports, opinions, commentary or other materials he receives from CFI directly or from its employees or through any analytical tools provided to him or third party research provided to him from the Company shall not be deemed as investment advice and it cannot be relied upon to make investment decisions. The Client commits to make his own research and from external sources as well to make any investment. The Client accepts that CFI will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. The contents of any report provided should not be construed as an express or implied promise, as a guarantee or implication that clients will profit from the strategies herein, or as a guarantee that losses in connection therewith can, or will be limited.


Forex and CFDs are leveraged products that incur a high level of risk and a small adverse market movement may expose the client to lose the entire invested capital. The vast majority of retail client accounts lose money when trading in CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. The possibility exists that you could sustain a loss in excess of your deposited funds even if a stop loss is used and therefore, you should not speculate with capital that you cannot afford to lose and be aware of trading risks. CFI International Ltd provides general information that does not take into account your objectives, financial situation or needs. The content of this website must not be interpreted as personal advice. Please ensure that you understand the risks involved and seek independent advice if necessary.

niss
forme
The Best Online Financial Trading Services, Middle East, 2020
Entrepreneur Magazine

Please publish modules in offcanvas position.