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How To Use Fibonacci Retracements

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How To Use Fibonacci Retracements

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Elementary Fibonacci

How to Use Fibonacci Retracements

Let’s talk about Fibonacci retracement levels.


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Fibonacci retracement levels are horizontal lines that


indicate the possible support and resistance levels
where price could potentially reverse direction.

The first thing you should know about the Fibonacci tool is that it works
best when the market is trending.

The idea is to go long (or buy) on a retracement at a Fibonacci support


level when the market is trending UP.

And to go short (or sell) on a retracement at a Fibonacci resistance level


when the market is trending DOWN.

Fibonacci retracement levels are considered a predictive technical


indicator since theyTrade
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The theory is that after price begins a new trend direction, the price will
retrace or return partway back to a previous price level before resuming
in the direction of its trend.

Finding Fibonacci Retracement Levels

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. Click on the Swing Low and drag the
cursor to the most recent Swing High.

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Got that?

Now, let’s take a look at some examples of how to apply Fibonacci


retracement levels to the currency markets.

Uptrend

This is a daily chart of AUD/USD.

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Here we plotted the Fibonacci retracement levels by clicking on the
Swing Low at .6955 on April 20 and dragging the cursor to the Swing
High at .8264 on June 3.

Tada! The charting software automagically calculates and shows you the
retracement levels.

As you can see from the chart, the Fibonacci retracement levels were
.7955 (23.6%), .7764 (38.2%), .7609 (50.0%*), .7454 (61.8%), and .7263
(76.4%).

Now, the expectation is that if AUD/USD retraces from the recent high, it
will find support at one of those Fibonacci retracement levels because
traders will be placing buy orders at these levels as the price pulls back.
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*The 50.0% ratio is not officially a Fibonacci ratio, but it was able to
sneak into the group and has never left.

Now, let’s look at what happened after the Swing High occurred.

Price pulled back right through the 23.6% level and continued to shoot
down over the next couple of weeks.

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It even tested the 38.2% level but was unable to close below it.

Later on, around July 14, the market resumed its upward move and
eventually broke through the swing high.

Clearly, buying at the 38.2% Fibonacci level would have been a profitable
long-term trade!

Downtrend

Now, let’s see how we would use the Fibonacci retracement tool during
a downtrend. Below is a 4-hour chart of EUR/USD.

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As you can see, we found our Swing High at 1.4195 on January 25 and
our Swing Low at 1.3854 a few days later on February 1.

The retracement levels are 1.3933 (23.6%), 1.3983 (38.2%), 1.4023


(50.0%), 1.4064 (61.8%) and 1.4114 (76.4%).

The expectation for a downtrend is that if the price retraces from this
low, it could possibly encounter resistance at one of the Fibonacci levels
because traders who want to play the downtrend at better prices may be
ready with sell orders there.

Let’s take a look at what happened next.

Yowza! Isn’t that a thing of beauty?!


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The market did try to rally, and stalled below the 38.2% level for a bit
before testing the 50.0% level.

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If you had some orders either at the 38.2% or 50.0% levels, you
would’ve made some mad pips on that trade.

In these two examples, we see that price found some temporary forex
support or resistance at Fibonacci retracement levels.

Because of all the people who use the Fibonacci tool, those levels
become self-fulfilling support and resistance levels.

If enough market participants believe that a retracement will occur near a


Fibonacci retracement level and are waiting to open a position when the
price reaches that level, then all those pending orders could impact the
market price.

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One thing you should take note of is that price won’t always bounce
from these levels. They should be looked at as areas of interest,

For now, there’s something you should always remember about using
the Fibonacci tool and it’s that they are not always simple to use!

If they were that simple, traders would always place their orders at
Fibonacci retracement levels and the markets would trend forever.

In the next lesson, we’ll show you what can happen when Fibonacci
retracement levels FAIL.

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Fibonacci Retracements are NOT Foolproof

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