What is Fibonacci retracement – Learn how to use it for a better trading

Do you want to know what is Fibonacci retracement and how to trade with it? Watch our latest video and find out the secrets behind this indicator.

What is Fibonacci retracement level – how to trade Fibonacci

Hello traders! So today, we are going to review the most commonly used indicator, or a charting tool in the trading business, which is called, Fibonacci lines. There is a huge number of different Fibonacci methods. Today, we are going to review Fibonacci retracement levels which is the most commonly used method, so if you are using TradingView for your charts, then you only go to the left side menu, and then you can see here you have a Fib retracement levels, and then, you can actually do the Fibonacci levels chart. So, let me show you how do you do. It’s extremely simple, so here you take Fibonacci retracement, then you take a high that you want to measure. So, more or less, what Fibonacci does, it connects two extreme points, usually a peak and a low, a high and a low, and then, dividing the vertical distance, so from here, because we are going to measure this here, to this low here, it actually divides the vertical distance by the key Fibonacci ratios. So, let me show you how you do it, it’s very simple. So, you measure the peak here and then you go down and then make sure that zero comes where the low is, and then you have the key levels. The key levels that we are talking about, are 23.60, 38.20, 50% which is a halfway distance, 61.80, 78.16, 88.60. The most important ones are located here in the menu, so we are talking about 38.20, 50, and 61.8. 61.8 is the major resistance retracement level and is usually the one where you see a reaction, which is quite strong from that level.

So, here in this chart, we have a Pound/Dollar, we have a Brexit downside move to almost 2000 pips move. And then, we look for a low which happened a couple of months ago, and then we saw a retracement, so look what’s happened. So, first of all, you’re not looking at this part between the high and the low, you only look at the part which is after the low has been made. So, after you connect the low, so the price starts here, this is the low, and then you have a retracement model. So, here, look, we retrace here, to 23.6 points, it’s a reaction. There, we have a reaction. So, here it’s a first reaction. Then we go again. We again fail. We go again, we fail. Then, once we move above, then this becomes actually a support. You can see after we cleared 23.6, now it’s not a resistance, now it’s a support. And, eventually, on the 38.2, here we come close, here we touched it and then again we retrace. We move it, this is a choppy trading. We go to the next one, it’s a 50%. We clear 50%, we go to 61%. Here, 61% is not truly respected, but what I wanted to show you is, what is actually respected is 78.6. That’s usually a common thing in the Pound/Dollar, that you have a big retracement to 78.6 or almost whole move as we traced. You can see here, we started at 1.50 and here we came all the way to 1.44 to form 1.19. So, we traveled 2500 pips to the high here. So, in this chart we have 23.6 respected, we have 78.6 move respected. So, this is how you do it. You connect the high with the low.

So, this here, again, is the Aussie/Dollar chart. Again, we have a high, we have a low, we connect high with the low and then we have the levels, as you can see here, in this chart, 50 is respected. You can see here high at 50, down move to 38.2, and then, again, the next move to 61.8. Why is this chart important? This is one of the most commonly used price actions that you will see. What you see is you see a reaction to one level, which is a 50, you see a move to 38.2 to the level before, which now acts as a support, you see then a move to 61.8 and then you see a move down. Why? Because, as I said, the 61.8 is also referred to as the Golden Ratio level, simply because it is an extremely important level in any charting that you do. Actually, I know traders who base all their trading plan based on the 61.8 retracement. So, here you can see we actually came close. Sometimes it touches, sometimes it goes above, sometimes it’s below, but here, we are talking about 10 pips or something. And then, after we touch 61.8, then we continue lower and we drop lower.

Look what happened here, again, in the Kiwi/Dollar. I intentionally used the same chart to draw two Fibonacci levels. So, again, we have a peak, we have a major move down. Look what happened here. We have peaks above 38.2, but we did not close. We have a move down. We touched 50, we moved down to 38.2, and then, of course, we have a move well above 61.8. But what happens is we close closer to 50, which immediately pushes the price extremely, extremely down. And then, we have a big move, which creates a new low. And then, on the same chart, you have a move from the down to the up, and then what I wanted to show you here, so we have a move down, up, and then you have first level here, touched 23.6 retracement. You go up, next, the second one is 38.2. First big retracement level, 23.6 is a first level, usually not respected, but 38.2 is the first key level. Big rejection here, we find support, we find buyers, we go create an equal high. Move again down, 38.2, up, 38.2. Again, we fail to close, you see, we rebounded, we go up before eventually pushing lower.

So, usually, it’s impossible to find a chart that respects every level, but as I said, certain pairs, for example, Dollar/Yen really likes 61.8, the pound really likes 78.6, and the last level of retracement, that is observed, is 88.6. It’s not a big level, it’s a minor level. As I said, the key levels are here, look, in the center, 38, 50, 61, 78.6 can also play a major role. But 88.6 is like a last trade station for the bulls because you see here, they almost retraced and lost all gains that they gained, but at 88.6, you see a reaction and then we see a push higher from this level.

So, Fibonacci retracements, we reviewed today, is one of the most widely used trading tools, mostly because of their relative simplicity, and especially to their applicability to any trading instruments or whatever you trade, Forex, commodities, stocks, cryptos. You can use Fibonacci retracement levels when you’re looking for trend moves when you’re looking for retracements. Here, for example, if you think this is an uptrend, and if you want to buy, then you look at 38.2. If you placed your order here, you put your Stop-Loss maybe somewhere in between 50 and 38.2, you will have caught this move, one move, second move. Here it will be closer to your stop, but, again, the third move is caught, so usually, I strongly advise when trading Fibonacci, put your Stop-Loss below the key level, below the levels, because when they push through, like we have here, then we usually very quickly go below, so you don’t lose more money, but if you want to trade only Fibonacci, then look at 38.2, 50 and 61.8.