Guide to Using Fibonacci Retracements Level

The Fibonacci retracements pattern can be useful for swing traders to identify reversals on a forex chart. On this page we will look at the Fibonacci sequence and show some examples of how you can identify this pattern.

Fibonacci Retracement Levels are:
0.382, 0.500, 0.618 — three the most important levels
Fibonacci retracement levels are used as support and resistance levels.

Fibonacci Extension Levels are:
0.618, 1.000, 1.618 — three the most important levels
Fibonacci extension levels are used as profit taking levels.

To set up Fibonacci on the chart we need to find out:

1. Is it uptrend or downtrend?
2. Highest and lowest swings in the chart formation (A, B points). And go with the trend!
   

We have an uptrend. A — our lowest swing, B — our highest swing. So, we will look to BUY some lots at the good lowest price and go up with the trend.

So, what we are expecting is next: the price should retrace (go down) from point B to some point C, and then continue up in the direction of the trend. Those three dotted lines (0.618, 0.500, 0.382) at the bottom on our picture shows three Fibonacci retracement levels where we expect the price to take a U-turn and go up again. There we will place our BUY order.

The best situation would be to buy at the lowest level — 0.618 — point C. And on practice the price usually gives us this chance. However, 0.500 is also a good level to place a BUY order.


Same steps will also apply to downtrend price movement.

Forex will often pull back or retrace a percentage of the previous move before reversing. These Fibonacci retracements often occur at three levels – 38.2%, 50%, and 61.8%. Actually, the 50% level really does not have anything to do with Fibonacci, but traders use this level because of the tendency of forex to reverse after retracing half of the previous move. Here is an example using a graphic explaining the retracement pattern.

This picture shows a graphical representation of the reversal points for forex in an uptrend.

After a forex makes a move to the upside (A), it can then retrace a part of that move (B), before moving on again in the desired direction (C). These retracements or pullbacks are what you as a swing trader want to watch for when initiating long or short positions.

Once the forex begins to pull back (retrace), then you can plot these retracement levels on a chart to look for signs of a reversal. You do not automatically buy the forex just because it is at a common retracement level! Wait, and look for candlestick patterns to develop at the 38.2% area. If you do not see any signs of a reversal, then it may go down to the 50% area. Look for a reversal there. You do not know if or when the forex will reverse at a Fibonacci level! You just mark these areas on a chart and wait for signal to go long or short.

Just remember...
Price is king. Wait for signs of a reversal before you initiate a trade!


Sources :

1. Fibonacci method in Forex charts.
2. How To Use Fibonacci Retracements.