How to use Fibonacci retracement? Something you should consider is that Fibonacci works well during the trending market.
The idea is that when the market is trending, there will be a price reversal before continuing the trend.
Traders use the Fibonacci retracement levels to do buy orders when the trend is up and make sell orders when the trend is down.
Fibonacci retracement is a technical indicator to predict the possibility of future prices will occur by using the retracement level of this indicator.
The theory is that when prices start with a trend, it will retrace to the previous price level, before resuming the trend.
TenkoFX broker, a brokerage firm that serves forex traders to trade on the forex, CFD and crypto trading markets.
Regulated by the International Financial Services Commission (IFSC) of Belize.
How to draw Fibonacci retracement
How to draw a Fibonacci retracement is to find the swing high and swing low.
In a downtrend market condition, by pulling from the swing high then dragging the cursor towards the swing low.
Conversely, uptrend market conditions are to pulling from the swing low then dragging the cursor to the swing high.
It seems simple, but in practice, you need experience in determining the swing high and swing low points, some use sixty periods in finding the swing high and swing low.
For a more detailed explanation, you can follow the following steps
- Mark the highest price point (High) and lowest price (Low) on the chart in a certain time frame. To draw Fibonacci Retracement, it requires special experience to get the best retracement level, some traders limit the last 60 candlesticks. Thus, traders only need to pay attention to where the highest and lowest levels are at the last 60 candles that line the right side of the chart.
- The next step is to find the Fibonacci retracement indicator if you use the MetaTrader platform you can find it on the Insert menu –> Indicators –> Fibonacci –> Retracements.
- Drag the Fibonacci retracement from left to right, click on the High or Low point on the left side of the chart, then click again on the High or Low point on the right side of the chart.
Note:: the right way to draw Fibonacci Retracement is from left to right; so that the direction can be from top to bottom (Retrace Downtrend) or from bottom to top (Retrace Uptrend).
Fib retracement uptrend
We already understand how to draw or draw a Fibonacci retracement on market uptrend conditions is to start at a swing low then drag to the swing high.
In the image above, we use the AUD / USD pair example by selecting the daily timeframe.
We determine the Fibonacci retracement by clicking on the swing low point.
Which is the example is at the price of 0.6955 which is the swing low on April 20.
Then we drag the cursor towards the swing high point.
Which in our example puts the swing high 0.8264 which is the swing high level on June 3.
After you place the swing low to the swing high, automatically on the trading platform you will display a retracement level consisting of 0.7955 (23.6%), 0.7764 (38.2%), 0.7609 (50.0%), 0.7454 (61.8%), and 0.7263 (76.4%).
By observing the behavior of prices at Fibonacci retracement levels we expect that prices will experience a pullback.
Or bounce back to the retracement level before finally returning to the uptrend as a continued trend.
In the example image above, we notice that after a recent swing high, the price moves back down past the 23.6% retracement level.
But apparently then the price is still continuing its decline towards the next retracement level at 38.2%.
Look at the 38.2% Fibonacci retracement level, for several days.
However, the price has not been able to pass that level to the next level.
In this case, it is the 50% retracement level.
Thus, in the example above, the 38.2% retracement level is the best time to make open Buy.
Then after about 14 July, the market repeated the uptrend movement and finally broken the swing high.
If you have opened a position at the retracement level 38.2%.
Hence you will get the maximum profit when the swing high is broken.
The thing to remember is that the Fibonacci retracement levels are support and resistance levels.
But to determine the best retracement level you need more experience because it is possible for prices to broken the 38.2% retracement level and then through the 50% level.
And some experience from traders states that the 50% level is the best level when prices retrace after trending.
Fib retracement downtrend
Next, we will study the function of the Fibonacci retracement if the market is downtrend.
To draw a Fibonacci retracement we again need a swing high and swing low, in the example below.
It is on the EUR/USD pair using a 4-hour timeframe.
Why in this example do we choose a 4-hour timeframe and not a daily timeframe?
In this case, we can actually also use daily timeframes.
But the selection of this timeframe depends also on trading style
Usually by using 4-hour timeframes, is for intraday trading, and daily timeframes are for long term swing trading.
In the example image above we find a swing high at 1.4195 on January 25 and Swing Low at a price of 1.3854 a few days later on February 1.
After we pull the Fibonacci retracement from the swing high then drag the cursor to the swing low price.
Then the trading platform will automatically appear at the retracement level.
From here we get the retracement levels at price 1.3933 (23.6%), 1.3983 (38.2%), 1.4023 (50.0%), 1.4064 (61.8%) and 1.4114 (76.4%).
When the market is in a downtrend, traders expect a pullback or retrace to occur before finally determining an open sell as a downtrend signal.
Fibonacci retracement level is the area of support and resistance of a price movement.
By observing the behavior of prices at the retracement level, the trader can get a trading signal to make an entry point decision.
Next we see after a few days the price of the swing low then rises towards the retracement level at 38.2%, but finally breaks the retracement level at 50%.
If you open short positions at the 38.2% or 50% retracement level.
Hence you will get the maximum profit because in the end after the price reaches the 50% retracement level.
Then resume the downtrend and break the swing low.
From the two examples that we have shown above give a lesson that retracement levels are a temporary area for support and resistance.
Often after going through a retracement level then prices resume their initial trend.
But needs to understand that sometimes the level seems to fool.
Because after all this tool is only a tool and does not provide a guarantee.
If the price has reached the retracement level and then will reverse the initial trend.
Using a Fibonacci retracement is one of the many trading strategies in the forex.
By taking the idea that in a trending market.
Whether it is an uptrend or downtrend, a pullback will occur or the price will retrace before the end resumes its initial trend.
By utilizing the Fibonacci retracement level.
The trader will determine the entry based on price behavior at that level.
Because that is one of the ways traders determine support and resistance.
But maybe after you learn how to use Fibonacci Retracement then you think, hmm it’s easy.
But in practice, it is not simple.
If the Fibonacci retracement level is sufficient to reference support and resistance.
Then the trader will only place a pending order in that area and wait for profit after the order is touched.
In practice, you might find that the Fibonacci retracement has fooled you.
Because after reaching the retracement level it turns out that the price continues to rally and again breakthrough that level.
Therefore using a risk management plan is the best way to anticipate this risk