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How to Use Fibonacci Retracement
How to Use Fibonacci Retracement

In this article, I’m going to show you how to apply Fibonacci retracement levels to a chart and what information it provides. Remember, indicators “indicate” possible price moves and entry-exit points. You’ll still need to interpret the data for yourself, so I’ll show you how to do that too.

What is Fibonacci retracement

To better understand what this tool does, let’s break down the terms Fibonacci and retracement.

Fibonacci was an Italian mathematician who discovered a natural sequence of numbers. The next number in this infinite sequence is created by adding the two numbers on the list before it. For example, 0, 1, 1, 2, 3, 5, 8, 13, 21, etc.

Retracement is the term used to describe how a price trend can temporarily retrace before continuing in the trend’s direction.

Why is Fibonacci retracing so useful?

The Fibonacci Retracement tool helps traders identify levels for setting Buy Stop Limits or Sell Stop Limits that can activate orders whenever a price retracement occurs. The indicator lines also help when searching for a trading entry point level on a trending price move.

How to set up Fibonacci levels

Let’s use the Fibonacci tool on a chart in your Exness account. EURGBP is prone to swings in price. It’s the ideal pair to show how the Fibonacci tool can assist you in placing a more profitable order prior to a price retracement. Set the timeframe to H4 (4 hourly) and the price as a line in the top menu of your trading platform.

Go to the top menu >> Insert >> Fibonacci >> Retracement

On the chart, draw a line at the start of a trend to the point of reversal by holding down the left mouse button until you get to the break.

How to set up Fibonacci levels
How to set up Fibonacci levels

When you trace a line from bottom to top, the Fibonacci tool will generate retracing levels that you can use as entry points.
How low will it go if a retracement occurs? The yellow lines or levels can assist you in forecasting in this case. The Fibonacci levels or lines on display provide a variety of entry points. The higher the line value, the greater the profit, assuming the trend continues. Although these entry point levels can be customised, most traders stick to the defaults. So, which level should you pick as your starting point?

Fibonacci retracement entry points

EURNZD began a bull run at 4:00 p.m. on March 26 in the example above. Four hours later, a retracement began. The Fibonacci tool has six levels, ranging from 0.0 (no retracement) to 100.0 (complete retracement) (full reversal). The choice of the appropriate level is ultimately yours, but the Fibonacci numbers serve as a useful guideline or benchmark. Always keep in mind that an indicator is not a time machine, and market prices do not always follow mathematical rules.

23.6: A minor change that occurs frequently and provides little value or increased profitability.

38.2: An accurate forecast at this level generates attractive profits, and the chances of it happening are still very good.

Half retracement at 50.0. By no means a difficult task, but the increase in your profit ratio is significant when compared to opening a position on the high.

61.8: We’re getting into the realm of the improbable. It’s a long shot to catch such a reversal in the middle of a rally, but it pays off handsomely when it does.

Most conservative traders will set entry levels between 23.6 and 50.0, but as your knowledge and experience grow, that number will rise.

How to set up Fibonacci levels
How to set up Fibonacci levels

by opening an order at a retracement level, your buy order will be more profitable if the upward trend continues.

In the example above, the reversal dropped to the 38.2 mark and then continued to rally well beyond the price at the time of drawing the Fibonacci lines.

Top Fibonacci trading tip

Remember that market prices don’t always line up perfectly with Fibonacci levels. If you trade on a daily basis, many unexpected changes can and will affect your orders. The longer the timeframe and the greater the price difference, most traders agree, the more accurate the forecast.

Trading indicator tools are similar to Amazon comments. You’ll get better long-term results if you consider more than one, so put in the effort and combine fundamental analysis with other indicators.

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