How to Use Fibonacci Retracements

What is the Fibonacci Retracement?

Fibonacci retracement levels, derived from the Fibonacci sequence, are horizontal lines representing potential support and resistance areas in trading.

The levels (23.6%, 38.2%, 50%, 61.8%, and 78.6%) indicate how much of a previous price move has been retraced.

Although 50% is not an official Fibonacci ratio, it is commonly used. This tool is versatile, as it can be applied between any two significant price points, generating relevant levels to assist in analyzing potential market movements.

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The Fibonacci Retracement Tool

Key settings we're using for the retracement levels are at 23.6%, 38.2%, 50%, 61.8%, and 78.6%, which indicate the extent of price retracement.

We can apply the tool between significant price points to analyze potential market movements.

How to Draw Fibonacci

When deciding which direction and where we need to draw the Fibs, we need to identify the direction of the trend.

In this example, we have an uptrend so we drag from low to high. We attach the Fibonacci tool on the bottom and drag it all the way to the top right.

Monitor the potential pullback zones

Our points of interest are the pullback zones with the key one, the "golden pocket" at 0.65 and 0.618.

Fibonacci is not something you trade off of but, as we call it, "added confluence".On the above example we can see how it played afterwards with the golden pocket being respected as a support zone before continuation

Paired with other indicators

When looking for high probability trades, it's ideal to pair multiple confluence/data points together.

Our favorite tool to use with Fibonacci is the Fixed range volume profile.

Volume is the most important thing we are dealing with in trading. In this example, we monitor at the "golden pocket" which also happens to be the beginning of a series of low volume nodes which act as s/r.

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Key Takeaways

- The most commonly used ratios include 23.6%, 38.2%, 50%, 61.8%, and 78.6%.

- Fibonacci retracement levels connect any two points that the trader views as relevant, typically a high point and a low point.

- These  levels should not be relied on exclusively, so it is dangerous to  assume that the price will reverse after hitting a specific Fibonacci  level.

- The percentage levels provided are areas where the price could stall or reverse.