Trader Lab · Technical analysis
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Fibonacci retracements: where a pullback may end
The Fibonacci retracement tool marks where a pullback may stop, using ratios like 38.2%, 50% and 61.8%. Because so many traders watch the same lines, orders often cluster there.
75%+ of retail investor accounts lose money trading CFDs.
The ratios
| Level | Typical use |
|---|---|
| 23.6% | Shallow pullback in a strong trend |
| 38.2% | Normal pullback in a healthy trend |
| 50% | Half the move; not a Fibonacci ratio but heavily watched |
| 61.8% | Deep pullback; a break may mean the trend has changed |
Drawing it
In an uptrend draw from the swing low where the move began to the swing high. In a downtrend, from the high to the low. Choose obvious swing points; on small, unclear waves the lines mean little.
Worked example on gold
Say gold rises from 4,000 to 4,100 dollars, a 100-dollar move. The retracement levels are:
- 38.2%: 4,100 minus 38.2, about 4,061.8
- 50%: 4,050
- 61.8%: 4,100 minus 61.8, about 4,038.2
Prices are only for the arithmetic. If price stalls at one of these and prints a reversal candle, that is a possible buy, with the stop beyond the next level or below the original low.
Look for confluence
A level that meets old support or resistance, a moving average or a reversal candle is far stronger than a Fibonacci line alone.
Drawing it in MT4 and MT5
- MT5: Insert, Objects, Fibonacci, Fibonacci Retracement. MT4: Insert, Fibonacci, Retracement.
- In an uptrend click the low and drag to the high.
- Double-click the object to add or remove levels.
Why some call it useless
With many lines, price always seems to have respected one in hindsight, and results change with the swing you pick. Fix your rules for choosing swings and only act where levels meet other evidence.
Questions
Do I draw Fibonacci from the low or the high?
Low to high for pullbacks in an uptrend, high to low in a downtrend. Drawing it backwards flips the levels.
Which Fibonacci level is strongest?
No fixed answer. 38.2% and 61.8% get the most attention, but where price stops depends on trend strength. Confluence matters more than the ratio.
Which timeframe works best?
It works on all, but swings on the 1-hour chart and above are watched by more traders and behave better.