Fibonacci Retracement Trading
Fibonacci retracements are one of the most powerful tools for predicting potential reversal levels.
The Fibonacci Sequence
Each number is the sum of the two preceding: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34...
The key ratios derived from this sequence:
- 23.6%
- 38.2%
- 50.0% (not Fibonacci but widely used)
- 61.8% - The Golden Ratio
- 78.6%
How to Draw Fibonacci Retracements
For Uptrend:
- Find significant swing low
- Find significant swing high
- Draw from low to high
For Downtrend:
- Find significant swing high
- Find significant swing low
- Draw from high to low
Key Levels to Watch
38.2% Retracement
- Strong trend = shallow pullback
- Good for aggressive entries
50% Retracement
- Most commonly watched level
- Psychological importance
61.8% Golden Ratio
- Deep but healthy pullback
- Often last line of defense for trend
Trading with Fibonacci
Entry Strategy:
- Identify clear trend
- Draw Fibonacci on recent swing
- Wait for price to pull back to key level
- Look for reversal candlestick pattern
- Enter with stop beyond next Fib level
Confluence
Fibonacci works best when combined with:
- Support/resistance
- Moving averages
- Trendlines
- Round numbers
Common Mistakes
- Drawing on random swings
- Using every level
- Ignoring the overall trend
- Not waiting for confirmation