Fibonacci retracement and how to apply it in trading

Fibonacci retracement and how to apply it in trading

  • On January 26, 2023

price action

Using 38.2 fibonacci retracement level levels as a standalone trading strategy will not prove out with in-depth testing. Ensure you add in confluence factors as mentioned in this trading setup article. In fact, price can still breach the pivot by “a few pips” and still be a valid setup. That’s called a failure test and one of my favorite trade entries to take advantage of the lack of knowledge by other traders. They are getting stopped out while I am entering or adding to a position.

What are Fibonacci retracement levels?

Fibonacci retracement levels are support and resistance levels that are calculated using several important points in a price series such as a high and a low. It is based on the famous Fibonacci sequence invented by the Italian mathematician Leonardo Pisano Bigollo. [1] A fibonacci number is an integer in an infinite mathematical sequence (1,1,2,3,5…) starting from the number 1 and then followed by the sum of the previous 2 integers.

Other numbers are not needed at this point as we are keeping this Forex trading strategy using Fibonacci, simple. By reducing the number of levels used for a trading strategy, I avoid clutter especially when using multiple swing points with the Fibonacci tool. The Fibonacci channel is a variation of the Fibonacci retracement tool, with support and resistance lines run diagonally rather than horizontally. Fibonacci retracement levels were formulated in ancient India between 450 and 200 BCE. When it doesn’t work out, it can always be claimed that the trader should have been following another Fibonacci retracement level instead. Demo account and see how well these levels predict support and resistance lines.

Limitations of Using Fibonacci Retracement Levels

This decline also formed a falling wedge, which is typical for corrective moves. Chaikin Money Flow turned positive as the stock surged in late June, but this first reversal attempt failed. Notice that TGT gapped up, broke the wedge trend line and Chaikin Money Flow turned positive .


The tool can be used across many different asset classes, such as foreign exchange, shares, commodities, and indices. 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. Are a popular choice among Fibonacci traders because of their ability to confirm breakouts based on an asset’s current trading range. An easier method of using the extension levels is simply to exit when the price finds significant support or resistance there. In other words, if the price seems to have trouble breaking through a Fibonacci trading level, then this can be deemed a good exit.

Best Fibonacci trading strategies

Using a low as a starting point and the high as the end point, the calculated will act as support levels while the extensions will act as resistance levels. Now that we have a set of rules for our fib trading strategy, let’s now apply that in the Forex market. Below you will find the price chart of the US Dollar Singapore Dollar currency pair based on the eight hour trading timeframe. The first condition is that a rejection candlestick in the form of a hammer, a shooting star or Engulfing pattern has formed at or near the fib retracement level. The second condition that needs to be met is for the Bollinger band to be penetrated by the above referenced candlestick formations at or near the Fibonacci level. PullbackA pullback occurs when the price of a stock or commodity pauses or goes against a prevailing trend in the stock market.

So, for example, during an uptrend, you might go long on a retracement down to a key support level (61.8% in the example below). When a GAL stock is trending up or down, it usually pulls back slightly before continuing the trend. Often, it will retrace to a key Fibonacci retracement level, such as 38.2% or 61.8%.

What are fibonacci retracement levels and extensions in trading?

The assumption is that all the information is already contained in the price. It forms in the spaces where ask is higher than bid while the price doesn’t fall beneath this level and keeps bouncing back up off of it. It forms in the space where bid is higher than ask while the price doesn’t jump over this level and keeps bouncing back down off of it. The market tends to respond to these levels, especially 38.2 and 61.8, so it is another system to keep up your sleeves to trade such situations. The sequence is quite simple as you can see from this example . We know that generational mechanisms in nature follow this principle.

The reason lunchtime trading is so challenging is that stocks tend to float about with no rhyme or reason. Talk to any day trader and they will tell you trading during lunch is the most difficult time of day to master. Unfortunately, with Fibonacci trading, you begin to expect certain things to happen. For example, if you see an extension as the price target, you can become so locked on that figure you are unable to close the trade waiting for bigger profits.

The Formula for Fibonacci Retracement Levels

The fact is I can put all the levels on a chart and price will bounce from one of them. Fibonacci retracement ratios are used as a trading strategy for the Forex market, Futures, Stock trading and even Options. Fibonacci Arcs provide support and resistance levels based on both price and time.

You can now see the 38.2 fibonacci retracement level retracement levels are calculated and loaded on the chart. 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%.

The idea is to go long on a retracement at a Fibonacci support level when the market is trending UP. Determine significant support and resistance levels with the help of pivot points. Commodity and historical index data provided by Pinnacle Data Corporation. The information provided by, Inc. is not investment advice. As we cover this chart of NZDUSD, consider we’ve been in a strong down trend combined with momentum into lows and price has collapsed into a previous support zone. Price action shows that the bears were losing steam and consideration for a long was made after price began to rally right after breaking lows.


The content has not been prepared in accordance with any legal requirements for financial analysis and must, therefore, be viewed by the reader as marketing information. TIOmarkets prohibits duplication or publication without explicit approval. They are not suitable for every investor, as they carry a high risk of losing your capital. Fibonacci retracement levels shown on the USD/CAD currency pair. In this case, price retraced approximately 38.2% of a move down before continuing. Additionally, you can use these target levels as confirmation indicators used in conjunction with other technical indicators such as moving averages, stochastics, and momentum.

  • In this lesson, we will look into the origins of the Fibonacci ratios, the most practical uses of retracements, and the process of building a trading strategy around it.
  • Some advanced traders will take it a step further and add Fibonacci arcs and Fibonacci fans to their trading arsenal in search of an edge.
  • The retracement concept is used in many indicators such as Tirone levels, Gartley patterns, Elliott Wave theory, and more.
  • The Fibonacci trading tool can be used to enter a position at one of the retracement levels when the price pulls back and then exit at one of the extension levels.

When it doesn’t work XRP out, it can always be claimed that the trader should have been looking at another Fibonacci retracement level instead. The Fibonacci retracement is a technique that’s quite useful on the gold market – the price of the yellow metal often stops its price swings once one of the retracement levels is reached. Secondly, with many traders using the Fibonacci retracement tool, there is a big chance they are looking to jump in on these Fibonacci levels themselves. And whilst there is no guarantee that the price action will actually bounce from these levels, you can at least have more faith in your trade.

  • The more confirming factors we use to study the trend and reversal, more robust is the signal.
  • The arcs appear as half-circles under your trend, which are the levels of the arc’s distance from the top of the trend with 23.6%, 38.2%, 50.0%, and 61.8% respectively.
  • Fibonacci retracement levels are calculated using Fibonacci sequence ratios.
  • The second condition that needs to be met is for the Bollinger band to be penetrated by the above referenced candlestick formations at or near the Fibonacci level.
  • We mention this a little later in the article when it comes to trading during lunch, but this method works really during any time of the day.
  • Day Trading is a high risk activity and can result in the loss of your entire investment.