Fibonacci Retracements in trading
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Fibonacci retracements are widely used by many financial market traders. Their success comes from the fact that a trend is never linear, there are always corrections in an upwards trend and rebounds in a downwards trend. These rebounds or corrections are more or less pronounced. Fibonacci retracements are used to determine previous retracement movement zones, i.e. levels at which rebounds or corrections can stop.Firstly we will look at how Fibonacci retracements are plotted and what they are used for, and then we will look at how they are used in line with the main trend and also in the opposite direction.
Fibonacci retracements connect the high and low point of a trend movement by graduating the movement from 0 to 100%. The commonly used levels of significant retracements are 23.60%, 38.20%, 50% and 61.80%.These are linked to the golden number discovered by the mathematician Leonardo Fibonacci.
In an upward trend, Fibonacci retracements drop from 0% to 100%. The lowest point that initiated the upward trend and the highest point on which a reversal appeared must be connected.
In a downward trend, Fibonacci retracements rise from 0% to 100%. The high point that initiated the downward trend and the low point on which a reversal appeared must be connected.
Always connect the points with the highest amplitude. During its bullish/bearish movement, the trend marked correction phases and low/high points were formed throughout the movement. You don't have to take that into account when you're plotting Fibonacci retracements.
To check if you have selected the right high and low point, wait for the price to make a first correction move to retrace 23.60%. Once the trend has broken through it your Fibonacci retracements are validated.
Fibonacci retracements are offered on all trading platforms. So you don't have to calculate levels manually, the platform does it for you.
Fibonacci retracements function as resistances and supports. You can use them for:
- Placement of stop loss: As with a resistance/support line, when a level is broken, you can place your stop loss above/below this level with a margin.The spread on the product you are trading should also be taken into account.
- Determining price objectives: Once the retracement is broken, the objective is the next Fibonacci retracement.So, at the break of the 23.60% retracement, your objective is the 38.20% retracement. You can then move your stop incrementally, if you believe in the correction will continue, or take your profits as soon as the target is reached.
Fibonacci retracements should not be used alone in your trading strategy, they should be coupled with other forms of technical analysis: chart patterns, technical indicators, and Japanese candlesticks.
Using Fibonacci retracements lets you take advantage of a correction movement on a trend by giving you price objectives.These objectives are inevitably closer, compared to using Fibonacci retracements in line with the initial trend. To optimize your entry points, you can look at the time units below those of your trade.
If the initial trend was strong (up/down, rally or large trend movement with a strong amplitude), the most common Fibonacci retracement is 38.20%, and in some cases 50%. The movement is often less steep than the initial trend movement.The correction is gradual and rarely sudden unless an economic announcement is made. So you usually have plenty of time to position yourself to take advantage of the movement.
If the initial trend was weak (small trend movement with a small amplitude), the price often reaches the Fibonacci retracement 50% or 61.80%. In this case, the correction movements are often quicker (less pressure to sell or buy from the initial trend).
When using Fibonacci retracements as a tool to deal with correction, you should not forget the initial trend. You must therefore be attentive to the technical elements showing a possible resumption of the initial trend such as the exit of a consolidation chartist figure (pennants, flags), a turning figure (bevel, diamond, double bottom/top, etc.) or the break of an upward/downward slant or a retracement in line with the initial trend.
If you see any of these signs on your price chart, you don't have to deal with the correction any longer, hoping for further movement. This is a sign of a resumption of the initial trend. If you ever get a little lost on the trend of the asset you are processing, look at the higher time unit to see the general trend.
Fibonacci retracements can also be used to detect signs of a resumption of the initial trend. For novice traders, this is often the strategy that is advised because the risk is lower and it is often easier to place stop losses. In addition, the price objectives are further apart, which offers a better expectation of gain. Initially, the general aim is to return to the lowest/highest price that was used to plot the Fibonacci retracements and then, in the event of a break in this price level, a new buy/sell signal is given.
The buy/sell signal is theoretically given by the break of a Fibonacci retracement in line with the initial trend. It is however advisable to also wait for the release or breakage of technical tools that I have previously told you about (consolidation charts, reversals, obliques, etc.). This reinforces the sale/buy signal and avoids many false signals.For this reason, it is advisable not to use only Fibonacci retracements in your trading strategy.
The inclusion of other technical tools when taking a position will in fact depend on the relevance of the Fibonacci retracement. If the price moves perfectly according to these levels during its correction movement, breaking a retracement in line with the trend may be enough to give a valid buy/sell signal. On the other hand, if the price has fluctuated between retracements, multiplying false breaks, it is essential to confirm the buy/sell signal with another type of chart. In this example, it is the breach of the bullish trend line that gives the sales signal:
How to plot fibonacci retracements
Fibonacci retracements connect the high and low point of a trend movement by graduating the movement from 0 to 100%. The commonly used levels of significant retracements are 23.60%, 38.20%, 50% and 61.80%.These are linked to the golden number discovered by the mathematician Leonardo Fibonacci.
In an upward trend, Fibonacci retracements drop from 0% to 100%. The lowest point that initiated the upward trend and the highest point on which a reversal appeared must be connected.
In a downward trend, Fibonacci retracements rise from 0% to 100%. The high point that initiated the downward trend and the low point on which a reversal appeared must be connected.
Always connect the points with the highest amplitude. During its bullish/bearish movement, the trend marked correction phases and low/high points were formed throughout the movement. You don't have to take that into account when you're plotting Fibonacci retracements.
To check if you have selected the right high and low point, wait for the price to make a first correction move to retrace 23.60%. Once the trend has broken through it your Fibonacci retracements are validated.
Fibonacci retracements are offered on all trading platforms. So you don't have to calculate levels manually, the platform does it for you.
How to use Fibonacci retracements
Fibonacci retracements function as resistances and supports. You can use them for:
- Placement of stop loss: As with a resistance/support line, when a level is broken, you can place your stop loss above/below this level with a margin.The spread on the product you are trading should also be taken into account.
- Determining price objectives: Once the retracement is broken, the objective is the next Fibonacci retracement.So, at the break of the 23.60% retracement, your objective is the 38.20% retracement. You can then move your stop incrementally, if you believe in the correction will continue, or take your profits as soon as the target is reached.
Fibonacci retracements should not be used alone in your trading strategy, they should be coupled with other forms of technical analysis: chart patterns, technical indicators, and Japanese candlesticks.
Fibonacci retracements as a plotting tool
Using Fibonacci retracements lets you take advantage of a correction movement on a trend by giving you price objectives.These objectives are inevitably closer, compared to using Fibonacci retracements in line with the initial trend. To optimize your entry points, you can look at the time units below those of your trade.
If the initial trend was strong (up/down, rally or large trend movement with a strong amplitude), the most common Fibonacci retracement is 38.20%, and in some cases 50%. The movement is often less steep than the initial trend movement.The correction is gradual and rarely sudden unless an economic announcement is made. So you usually have plenty of time to position yourself to take advantage of the movement.
If the initial trend was weak (small trend movement with a small amplitude), the price often reaches the Fibonacci retracement 50% or 61.80%. In this case, the correction movements are often quicker (less pressure to sell or buy from the initial trend).
When using Fibonacci retracements as a tool to deal with correction, you should not forget the initial trend. You must therefore be attentive to the technical elements showing a possible resumption of the initial trend such as the exit of a consolidation chartist figure (pennants, flags), a turning figure (bevel, diamond, double bottom/top, etc.) or the break of an upward/downward slant or a retracement in line with the initial trend.
If you see any of these signs on your price chart, you don't have to deal with the correction any longer, hoping for further movement. This is a sign of a resumption of the initial trend. If you ever get a little lost on the trend of the asset you are processing, look at the higher time unit to see the general trend.
Fibonacci retracements in line with the trend
Fibonacci retracements can also be used to detect signs of a resumption of the initial trend. For novice traders, this is often the strategy that is advised because the risk is lower and it is often easier to place stop losses. In addition, the price objectives are further apart, which offers a better expectation of gain. Initially, the general aim is to return to the lowest/highest price that was used to plot the Fibonacci retracements and then, in the event of a break in this price level, a new buy/sell signal is given.
The buy/sell signal is theoretically given by the break of a Fibonacci retracement in line with the initial trend. It is however advisable to also wait for the release or breakage of technical tools that I have previously told you about (consolidation charts, reversals, obliques, etc.). This reinforces the sale/buy signal and avoids many false signals.For this reason, it is advisable not to use only Fibonacci retracements in your trading strategy.
The inclusion of other technical tools when taking a position will in fact depend on the relevance of the Fibonacci retracement. If the price moves perfectly according to these levels during its correction movement, breaking a retracement in line with the trend may be enough to give a valid buy/sell signal. On the other hand, if the price has fluctuated between retracements, multiplying false breaks, it is essential to confirm the buy/sell signal with another type of chart. In this example, it is the breach of the bullish trend line that gives the sales signal:
