Fibonacci retracements mark how far a pullback has gone compared with the move before it. The common levels are 38.2%, 50% and 61.8%. They work partly because so many traders watch them, and best when they line up with other evidence.
How to draw them
- Find a clear impulse move: a strong swing from a low to a high (or high to low).
- In an uptrend, drag the tool from the swing low to the swing high.
- In a downtrend, drag from the swing high to the swing low.
- Use candle wicks consistently, not bodies one time and wicks another.
Reading the levels
- 38.2%: shallow pullback, typical in strong trends.
- 50%: not a Fibonacci ratio but widely watched.
- 61.8%: the 'golden ratio'; a deep but common pullback.
- Beyond 78.6%: the trend is in doubt.
The confluence entry
A Fibonacci level on its own is weak. It becomes strong when it lines up with an old support or resistance, a moving average or a round number. Wait for price to reach that confluence zone and for a confirmation candle before entering.
Stops and targets
- Stop beyond the 78.6% level or the swing low.
- First target: the previous swing high.
- Extended target: the 127.2% or 161.8% extension of the move.