# How to Trade Fibonacci and Fibonacci Retracements Successfully

These levels provide signals for traders to enter new positions in the direction of the original trend. In an uptrend, you might go long (buy) on a retracement down to a key support level. In a downtrend, you could look to go short (sell) when a security retraces up to its key resistance level. Fibonacci retracements https://www.xcritical.com/blog/how-to-use-the-fibonacci-retracement-indicator/ are the most widely used of all the Fibonacci trading tools. That is partly because of their relative simplicity and partly due to their applicability to almost any trading instrument. They can be used to draw support lines, identify resistance levels, place stop-loss orders, and set target prices.

As with all technical analysis tools, Fibonacci retracement levels are most effective when used within a broader strategy. Using a combination of several indicators offers a chance to more accurately identify market trends, increasing the potential for profit. As a general rule, the more confirming factors, the stronger the trade signal.

## How to Draw Fibonacci Levels

However, they are mostly used to calculate how far the price of an underlying asset can travel after a retracement is done. This means that Fibonacci retracement levels are used to know when to enter a trend, while the Fibonacci extension levels are used to identify the end of that trend. Fibonacci trading strategies are popular trading tools that use some of the purest mathematical metrics to try to predict trade entry and exit points. Referring to the chart above as an example, the 78.6% retracement level stands guard as the final harmonic barrier before an instrument completes a 100% price swing (higher or lower). This is valuable information because it tells us that a breakout above this level in an uptrend, or a breakdown in a downtrend, will extend all the way to the last swing high or low as a minimum target.

Usually, these will occur between a high point and a low point for a security, designed to predict the future direction of its price movement. Fibonacci retracements can be used to place entry orders, determine stop-loss levels, or set price targets. Since the bounce occurred at a Fibonacci level during an uptrend, the trader decides to buy. The trader might set a stop loss at the 61.8% level, as a return below that level could indicate that the rally has failed. Fibonacci retracement levels often indicate reversal points with uncanny accuracy. Ideally, this strategy is one that looks for the confluence of several indicators to identify potential reversal areas offering low-risk, high-potential-reward trade entries.

## Tips: How to trade using Fibonacci Retracements

Each number in the sequence is about 1.618 times greater than the number that came before; the larger the number, the more precise it is to the 1.618 multiple. This number, 1.618, is referred to as the Golden Ratio–also known as Phi–and is considered the most irrational number in mathematics. Interestingly, https://www.xcritical.com/ it appears frequently in nature, such as in the wings of a butterfly, the shell of a mollusk, the structures of many kinds of flowers, and even the tail of a chameleon. Brian Lund is a Southern California–based fintech executive, author, and trader with over 35 years of market experience.

The ratios, integers, sequences, and formulas derived from the Fibonacci sequence are only the product of a mathematical process. However, it can be uncomfortable for traders who want to understand the rationale behind a strategy. Whether you want to believe it or not, Fibonacci levels play a critical role in defining support and resistance levels when day trading. Before we go into the gritty details about Fibonacci trading strategies, it is worth our time to discuss the different types of fibonacci trading personas you might encounter.

## Fibonacci Extensions Summary

Let’s tackle the subject with a quick Fibonacci primer and then get down to business with two original strategies that tap directly into its hidden power. On the other hand, a promising bullish reversal signal might arise if prices set a fresh low while the RSI shifts to an upward trajectory, indicating a weakening of bearish momentum. Despite some timid buying interest observed on Friday, propelling Apple’s stock by a modest 0.2%, the RSI’s position in oversold territory implies that sellers continue to have the upper hand in the short term. He noted that, after moving along with the main trend, a price often retraces before resuming its prior movement.

Once we have an extension, we can use the Fibonacci tool to validate and set our entry traps. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs.

## Incorporating Fibonacci Levels Into Other Strategies

If the market is trending downwards, we do exactly the same, except the inverse. Simply click and drag the Fibonacci retracement tool from the most obvious Swing High to the Swing Low (Point A to Point B). Drag the Fibonacci retracement tool from the Swing Low to the Swing High (Point A to Point B).

- Downside grids are likely to use fewer ratios than upside grids because extensions can carry to infinity but not below zero.
- The keen-eyed will note that 50% and 1.50% tend to also be included as levels in Fib charts.
- And to go short (or sell) on a retracement at a Fibonacci resistance level when the market is trending DOWN.
- The key Fibonacci ratios used in the division are 23.6%, 38.2%, 50%, 61.8%, and 100%.
- It’s a simple matter of selecting the low price and dragging the cursor over to the higher price.
- Fibonacci retracement levels are illustrated by taking high and low points on a chart and marking the three most important Fibonacci ratios of 23.6%, 38.2% and 61.8%.

For this reason, it is important not to trade solely based upon Fibonacci extensions. A mix of another trading strategy and the use of the Fibonacci extension as a confluence to an already-working trading strategy can be instrumental. For example, the price can easily break the 123.60% extension percentage and may reverse from 161.80%. Another limitation in Fibonacci retracement level strategies creates a dilemma in many traders. For example, as the retracement levels are close to each other, many traders fall into an extensive dilemma when they think a certain retracement level would work and another would not.

## Forex Strategies by Traders Using Fibonacci Levels

A line for 50% level is also drawn, although it is not technically a part of the Fibonacci level. Today, I walked you through using the Dual Dynamic Fibonacci Retracement Levels Indicator on TradingView. This powerful tool calculates pivot points and determines Fibonacci retracement levels based on your position in the market. I explored every input, from lookback periods to toggling extra levels, to shifting and extending lines…. Thanks to the application of our Fibonacci retracement levels, we can see that the US Dollar has retraced to the 50% fib level and has rejected it.