A Guide to Fibonacci Retracement Levels

A Guide to Fibonacci Retracement Levels

The Fibonacci levels are points on a chart represented by horizontal lines which indicate potential price turning points. This retracement tool is fairly predictive in determining areas of possible future price turns once one has current levels of the most recent price turns in the form of swing highs and lows.

Retracements are temporary reversals in price movements after impulsive moves in one direction to a gentle move in the other. They come after price has been mostly trending in one direction. When such a move is interrupted by a minor or temporary move in the opposite direction, such price change is what is know as price retracement.  This retracement could be with single colour candlesticks (which I’ll refer to as smooth retracement) or mixed (which I’ll call corrective). The mixed candlesticks are in a wavelike pattern with price creating a series of lower lows and lower highs in the case of a previous impulsive bullish move, and higher highs and higher lows in the case of a previous strong bearish impulsive movement.


The candles in a retracement are usually smaller than those in an impulsive move. As price retraces, the retracement is either a smooth one with single colour candles relatively smaller than those in the preceding impulsive move, or it’s a corrective one in form of waves.





Learn To Use Fibonacci Retracement In Your Trading

There is a very wide range of technical indicators but today we’ll focus on the Fibonacci levels as a tool you can include in your trading arsenal. It’s one of the most important technical analytical tools one could use in their trading. It’s especially useful for beginners because:


  • Its an aid in determining entry points and targets.
  • Retracement levels help give a general idea of when to buy or sell a financial instrument as price retraces or corrects.
  • It also gives a good idea of where support and resistance, or supply and demand zones might be on any given timeframe


Fibonacci Numbers/Ratios

Fibonacci is a sequence made of a series of numbers. Each number in the series is got by adding the latest number in the sequence to the one preceding it to create/arrive at a new one. For example, the series include 0, 1, 1, 2, 3, 5, 8, 13, … the numbers are infinite. Starting from 0, the next number can only be 1. When you add 1(the later number) to 0 (the former number) you arrive at 1 as a new number. That’s why there are two 1’s in the sequence. In short, 1+0=1, 1+1=2, 2+1=3, 3+2=5, 5+3=8, 8+5=13, and the sequence goes on.


The Fibonacci levels are formed by ratios in the sequence. Each level is a ratio between two other numbers. These ratios include 0.236 (23.6%), 0.382 (38.2%), 0.5 (50%) 0.618 (61.8%), and 100% 1.618, 2.618, 4.236. These ratios or percentages are got by dividing certain numbers in the sequence by other numbers. For example, to get 23.6% (0.236) you divide one number in the series buy the number that is three places after it in the sequence for example 8/34=0.236. 38.2 ratio is got by dividing one number in the series by the number two places after it in the series, for example 55/144=0.3819. The 61.8% is got by dividing one number in the series by the number that follows it, for example 55/89=0.6179. 50% ratio is usually included but it’s not a Fibonacci number.


These ratios are well respected and applied in every financial market including stocks, cryptos, forex, indices, commodities, etc to determine the amount of price retracement or levels at which price reverses its current trend/direction. The golden ratio is the 1.618 or its inverse 0.618. This is because in the Fibonacci series, the next number is approximately 1.618 times greater than the previous one.  For example, 8/13= 0.618. In percentage terms it’s 61.8% which is equivalent to 0.618.


  • 0.236– This is the first retracement level to consider while trading. Its however a weak level given its lack of depth. When price retraces to this level, it has retraced 23.6% of the previous move. It is not considered important compared to the others as we’ll see because of its shallowness and the tendency of price to easily blast through it. As far as fibs go in acting as support and resistance levels, this is extremely unreliable in predicting price turns.


  • 0.382– This level is significant. It’s the first strong retracement level. Price will very often retrace to it before a continuation in the previous direction especially during strong impulsive moves. It’s the first target area to consider as a target when taking profit when trading retracements and the first area when catching the deep before a continuation. When price retraces to this level, its has reversed 38.2% of the previous move.


  • 0.5– This is a 50% price retracement against the previous move. Its one of the most significant retracement levels. It indicates price correcting half the previous swing.


  • 0.618– This is the most significant number in the Fibonacci ratios when it comes to retracements. Its commonly referred to as the “Golden ratio”. It’s a very strong price reversal level that acts as a support and resistance area.


  • 0.786– This is the last retracement level to consider when trading retracements. If price deeps and closes below this level, its no longer a correction, its instead considered a reversal of trend at least in the short term and the move shouldn’t be regarded as a retracement when trading Impulsive and corrective moves.  Its the deepest retracement point that should hold price for the next impulsive move.


  • Price could also retrace 100% of the previous move. I wouldn’t regard that as a retracement as its a complete price reversal. Its rather a trend change


  • -0.27– This is not exactly a Fibonacci number. However, its an great extension number that indicates an important level that price will get to in an impulsive move before a reversal. It’s a very good point for a first target.


  • -0.618– This is your golden ratio – This is an extension level which helps serve well in the prediction of how far price could go after an extension. It too helps in setting of targets


How To Access The Fibonacci Tool

There are different softwares and trading platforms, but for this tutorial we’ll focus on the most common and popular forex trading platform – the Metatrader4, commonly referred to as MT4.


Open the MT4 platform of your preferred broker. Then use one of these ways;

Click on ‘Insert’, click or simply hoover the cursor over ‘Fibonacci’, and select ‘Retracements’





Alternatively, you could go to ‘view’, select ‘Toolbars, and select ‘Line Studies’. This will bring a bar on top of the MT4 screen with different line tools. Select  the one with four dotted lines





After selecting the Fibonacci tool, proceed to place it on the chart of interest with a click on any area of the chart, placing the cursor at the point from which you would want to start measuring the retracement and clicking and  holding down the left button of the mouse while moving the cursor to the point where the move we want to measure ended.







How To Set Fibonacci Numbers/Levels

After placing the Fibonacci tool on the charts, double clock it to highlight it. Right click it to bring you a menu and select ‘fibo properties’




It will bring you a box like the one below. To delete any of the numbers, click on the one you desire to delete. This will highlight it. proceed to click ‘delete’. Click ‘ok’ to save the changes


To add any Fibonacci number, click ‘add’. This will create a new row. Proceed to fill in the number for the level you desire. Then click ‘ok’ to save the changes





How To Determine The Retracement Levels On A Chart

The forex charts are a representation of price changes over a period of time represented graphically in the form of candlesticks, bar charts, line charts, and other forms of custom-made charts. It could be a minute, 5minutes, 30minutes, an hourly chart, 4hour, Daily, weekly or monthly charts. Of course there are other timeframe charts besides these, but whatever they are, each is just a representation of the movement of price within that given period of time as indicated by the chart timeframe.


Price moves from one point to another over a period of time in form waves which creates swings both highs and lows. In an uptrend, a swing high is an impulse move to the top and a swing low a retracement. Inversely, in a down trend the swing low is an impulse move to the downside and a swing high a retracement of the previous movement. The main purpose for using Fibonacci retracement levels is to determine the size of potential correction against the main trend




To measure the level of retracement, you apply the Fibonacci tool by drawing it from the beginning of the impulse move to where it stopped before a correction or retracement. You draw the Fibonacci from the beginning/start of the impulsive move to its end or from the one end of the swing to the other. Click on the Fibonacci retracement tool, move the cursor to the beginning of the impulsive move, then press and hold the left click while dragging the cursor to the end of the impulsive move.


Take these steps:


Firstly, click on the ‘Fibonacci retracement’ tool.


Next, choose an obvious high and low of the price chart. These should be the latest highs and lows on the charts with no higher high or lower low to the right of those highs and lows you have chosen.


Lastly, place the cursor at the lowest point of price at the beginning of the upward move, hold down the click and drag it to the highest point of price connecting both the high and low of the current price move. Do the inverse in a downtrend.


Once this is done, different horizontal lines will appear on the chart representing the different Fibonacci levels according to your customized settings as you chose to add or delete, such as 0.0%, 23.6%, 38.2%, 50%, 61.8%, 78.6%, etc.


For a bullish retracement, begin your Fibonacci at a swing low, and end it at a swing high.

For a bearish retracement, begin your Fibonacci at a swing high, and end it at a swing low.





In an uptrend, to measure the amount of retracement/correction, place the cursor at the beginning of the leg you want to measure and drag the cursor to the top of the leg. You do the opposite in the downtrend. Just for emphasis, move the cursor to the chart, point it at the beginning of the move that preceded the retracement, left click and hold down the button, while dragging the cursor to the last point that price reached at before it began the retracement.




When determining the target after an impulsive move and a retracement, you place the cursor at the end/low of the retracement and drag it to the beginning/top of the retracement in case of an uptrend. Do the reverse in a downtrend.





Godfrey Kakulu

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