Effective Strategies For Using Fibonacci Retracement

The purpose of Fibonacci retracement in trading is its ability to predict future strong price levels. By applying these levels to a live chart, traders can identify areas where price may retrace (retracement) or pause before finally reversing or continuing in the original trend direction. This time-tested method is especially useful in today's volatile markets and should definitely be in the arsenal of a successful trader.

What is a Fibonacci Retracement?

What we now call Fibo levels is based on the properties of a sequence of numbers described by the famous Italian Leonardo Fibocacci. A series of numbers, in which each number is the sum of two previous numbers (0, 1, 1, 2, 3, 5, 8, 13, ...), works perfectly well both in living nature and in various fields of human activity.

Calculating Fibonacci levels

In trading, the 23.6%, 38.2%, 50%, 61.8% and 78.6% Fibonacci levels represent potential support/resistance zones where price can take a strong impulse to reverse or continue trending after a short-term consolidation.

Fibonacci logic corresponds to the market "crowd psychology", which enhances the reliability of such signals. The price movement according to the calculated levels is called Fibonacci retracements.

How to draw Fibonacci Retracement level

Fibo technical tools are embedded in all trading platforms: let us remind you how to perform basic constructions in two popular terminals.

Fibo Levels in MetaTrader

Fibo for downtrend reversal in TradingView:

Fibo Levels in TradingView

Before using the Fibonacci retracement tool, it's crucial to identify the prevailing trend in the market. Whether the market is in an uptrend or downtrend determines how the tool will be applied and which levels will be of interest.

In an uptrend, Fibo levels are built from swing-low to swing-high and help to identify potential support levels, on a pullback from which the price will continue the bullish trend. If the levels break down and the price reverses, do not hurry to remove the built structure. On the new trend, the price continues to move along the same levels for some time, until the scheme is fully worked out.

Fibonacci retracement levels on an uptrend

In a downtrend, Fibonacci Levels are used to identify potential resistance levels where the price may reverse to the downside. Traders build a chart of the instrument from the swing high to the swing low: we will either sell on the pullback from the correction level (23.6%, 38.2%) or buy if the trend reversal is confirmed.

Fibonacci retracement on a downtrend

If during the movement the market updates one of the swing-high or swing-low points, it is recommended to correct the already built Fibo levels.

Fibo correction by new key points

Accumulated trading statistics claim that using Fibonacci levels in the actual direction is more effective than against the trend. But we believe that the reversal signal in this structure turns out to be stronger.

Recall:

• The result of your deals depends on the accuracy of building the levels.

• If you have doubts about the built levels, go to the senior timeframe and build another Fibo grid. If the medium-term trend is stable, the key levels of both grids fall into approximately the same price zones.

• The reverse scheme also works: if the trend is really going to reverse, the reversal signal will be both on the smaller and on the older timeframe.

Which Fibo levels are the most effective?

It is only possible to assess the value of each Fibonacci retracement level in the overall context of the market, but trading signals at certain levels are more reliable.

• 61.8% (0.618): "golden section", the strongest in the Fibo series. If the price reaches this level on the actual trend, the probability of reversal is very high. It is necessary (as a minimum1) to pull up StopLoss on open positions and prepare to enter the market in a new direction.

• 76.8% (0.768): an intermediate level, which is most often not included in the standard conditions of construction, but is always visible on the real market. At this level the volumes of positions for reversal start to accumulate (it can be seen on market and tick volume indicators). It is from here that you should start, if the reversal is confirmed at the level of 100%.

• 50% (0.5): an absolutely psychological level, although from the point of view of technical analysis it is rather weak and is not mentioned in the Fibonacci series at all. This is where the longest consolidation phase is usually located.

• 38.2% (0.382): It is used to evaluate the initial correction after the first strong impulse. A real reversal is unlikely, but if the correction continues beyond the 23.6% level, the entire current Fibonacci retracement pattern is canceled.

• 23,5% (0.236): It is used to identify small corrections and can serve as an early signal of a trend change.

How to use Fibonacci Retracement

Combine with other technical indicators

Fibo levels do not give independent trading signals, but when combined with additional standard indicators, stable trading systems are obtained.

Strategy Fibo+Stochastic

In combination with MACD trend oscillator in the Fibonacci zone you can get leading signals.

Strategy Fibo+MACD

Effective fibonacci retracement strategies are obtained in combination with market profile tools - in the situation in the example below it was possible to successfully work the trading day in both directions.

Strategy Fibo+VolumeProfile

How to improve the effectiveness of Fibonacci levels?

The accuracy of Fibo signals in real trading can (should!) be improved by applying several strategies and techniques:

• Key price zones : Look for Fibonacci levels that coincide with support/resistance zones that have been identified by other methods.

• Trend lines and channels : Look for Fibonacci levels that coincide with trend lines or channel boundaries.

• Additional indicators : Use oscillators ( RSI, MACD, Stochastic etc) to confirm signals from Fibonacci levels.

• Volume Analysis : Watch the trading volume at Fibonacci levels - increased activity confirms the importance of the level and the possibility of a reversal.

• Level Confluence : Look for the coincidence of several Fibonacci levels from different timeframes or different waves of price movement. The more levels that match, the stronger the support or resistance level.

• Chart patterns : Look for confirmation of Fibonacci levels using technical analysis patterns such as double bottoms, head and shoulders, flags, and pennants. A reversal signal additionally confirmed by a chart or candlestick pattern is almost 100% success.

• Risk Management : Set stop losses and take profits based on Fibonacci levels and other key levels to limit losses and lock in profits. Calculate position size based on risk level and distance between Fibo levels.

• Analyze price history : check how Fibonacci levels have worked in the past on the selected asset to correct your targets in time. Keep in mind that the actual Fibonacci price zone can be extended by 10-15 pips if several historical strong levels fall within this zone.

Combining these methods will help you increase the accuracy and effectiveness of using Fibonacci levels in trading.

The result of using the Fibonacci correction strictly depends on the accuracy of its construction, i.e. on the reliability and technical capabilities of your main financial partner - broker. Slippage, loss of communication, "failure" in the flow of quotes, low speed of order processing and other problems affect the efficiency of your actions. Besides, serious trading platforms offer additional analytical tools, indicators, scripts and other resources that help traders make more informed decisions.

We have independently assessed the reliability and technical conditions and offer you to choose a convenient option from the top 5 best ones:

Benefits and challenges of Fibonacci levels

In almost 100 years of using Fibonacci levels, the market has accumulated a lot of statistics on the results, and here's what you get:

Risks of using Fibonacci methods

Fibonacci retracement is a graphical method of analysis, so its main risk is considered to be errors in calculating key points.

If you have incorrectly identified the upper and/or lower swing bars, all the constructed levels become erroneous, and in these zones the market will choose a completely different scenario than you expect.

In addition, consider the following:

• False signals in a volatile market;

• Market Crowding.

Since Fibonacci levels and fibonacci retracement strategy are a popular tool among traders, they can become a self-fulfilling prophecy. This means that a large number of traders can open positions at the same level at the same time, which can lead to sudden and significant price swings.

• Subjectivity of the starting and ending point for building levels

• Ineffectiveness in trend conditions

• Inaccuracy of signals in short-term trading due to “market noise”

• Cancellation of signals at speculative volatility

Incorrect assessment of the fundamental background, such as news or other force majeure, will also cause an inadequate reaction at the Fibo levels.

This problem can only be solved by correcting chart constructions and confirming trading signals with additional indicators.

Expert option: Market logic is beyond competition

Andrey Mastykin Author, Financial Expert at Traders Union

I prefer fundamental market assessment, but it is the Fibonacci retracement levels that have maintained my confidence in classical technical analysis for many years. I am sure that Fibonacci retracement zones are the best option for setting TakeProfit/StopLoss, if the key points for building them are chosen correctly. Fibonacci retracement levels provide specific levels where traders can enter or exit trades, making decision-making more structured.

The universality of the Fibonacci scheme , which does not depend on the timeframe and asset type, can be used to check the signals of any strategies.

So, if a strategy offers you a trading signal, especially for a trend reversal, don't be lazy - build Fibonacci levels on the nearest section of the trend , and if the current price falls into the key zone, you can safely open a position.

Conclusion

Fibonacci Retracement is a simple, universal, price history-tested technical analysis tool, its calculations are based not only on math, but also on market psychology. So the ability to use it effectively should be in every trader's asset. In any difficult situation, for example, when there is a lack of technical or fundamental information - build Fibo levels and the market will definitely work them out.

Profits to y’all!

FAQs

Related Articles

Team that worked on the article

Chinmay Soni

Developmental English Editor

Chinmay Soni is a financial analyst with more than 5 years of experience in working with stocks, Forex, derivatives, and other assets. As a founder of a boutique research firm and an active researcher, he covers various industries and fields, providing insights backed by statistical data. He is also an educator in the field of finance and technology.

As an author for Traders Union, he contributes his deep analytical insights on various topics, taking into account various aspects.

Learn about our editorial policies

Dr. BJ Johnson

Developmental English Editor

Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.

Mirjan Hipolito

Cryptocurrency and stock expert

Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO).