about fibonacci retracement

8/12/2019 About Fibonacci Retracement

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Fibonacci Who?

We will be using Fibonacci ratios a lot in our trading so you better learn it and love it like your

mothers home cooking. Fibonacci is a huge subject and there are many different Fibonacci studies

with weird-sounding names but were going to stick to two: retracement and extension.

Let us first start by introducing you to the Fib man himselfLeonardo Fibonacci.

!o" Leonardo Fibonacci isnt some famous chef. #ctually" he was a famous $talian mathematician" also

known as a su%er du%er uber ultra geek.

&e had an '#ha() moment when he discovered a sim%le series of numbers that created ratios

describing the natural %ro%ortions of things in the universe.

*he ratios arise from the following number series: +" ," ," " " /" 0" ," ," 1" //" 02" ,11

*his series of numbers is derived by starting with + followed by , and then adding + 3 , to get ," the

third number. *hen" adding the second and third number 4, 3 ,5 to get " the fourth number" and so

on.

After the first few numbers in the sequence, if you measure the ratio of any number to thesucceeding higher number, you get .618. For exampe, !" di#ided by $$ equas .618.

$f you measure the ratio between alternate numbers you get .0. For exam%le" 1 divided by 02 6

+.0 and thats as far as into the ex%lanation as well go.

*hese ratios are called the 'golden mean). 7kay thats enough mumbo jumbo. With all those numbers"

you could %ut an ele%hant to slee%. Well just cut to the chase8 these are the ratios you to know:


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Fibonacci %etracement &e#es

*he ratios arise from the following number series: +" ," ," " " /" 0" ," ," 1" //" 02" ,11

+.;4from 1


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Fibonacci %etracement

he first thing you shoud *now about the Fibonacci too is that it wor*s best when the

mar*et is trending.

*he idea is to go long 4or buy5 on a retracement at a Fibonacci su%%ort level when the market is

trending u%" and to go short 4or sell5 on a retracement at a Fibonacci resistance level when the market

is trending down.

$n order to find these retracement levels" you have to find the recent significant @wing &ighs and

@wings Lows. *hen" for downtrends" click on the @wing &igh and drag the cursor to the most recent

@wing Low.

For u%trends" do the o%%osite. Dlick on the @wing Low and drag the cursor to the most recent @wing

&igh.

Eot thatB !ow" lets take a look at some exam%les on how to a%%ly Fibonacci retracements levels in

the markets.

Uptrend

*his is a daily chart of #C


4/26

As yo! can see (rom the chart) the retracement levels were .*955 +2%.6,-) .**6# +%".2,-) .

*69 +5.,-) .*#5# +6.",-) and .*26% +*6.#,-.

/ow) the e0pectation is that i( A131S retraces (rom the recent high) it will (ind s!pport at one

o( those Fibonacci levels beca!se traders will be placing b!y orders at these levels as price

p!lls back.

/ow) let4s look at what happened a(ter the Swing High occ!rred.

rice p!lled back right thro!gh the 2%.6, level and contin!ed to shoot down over the ne0t

co!ple o( weeks. t even tested the %".2, level b!t was !nable to close below it.

Later on) aro!nd $!ly #) the market res!med its !pward move and event!ally broke thro!gh

the swing high. 7learly) buying at the 38.2% Fibonacci level would have been a profitable

long term trade!

Downtrend

/ow) let4s see how we wo!ld !se the Fibonacci retracement tool d!ring a downtrend. 8elow is a

#ho!r chart o( :1;31S.


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As yo! can see) we (o!nd o!r Swing High at .#95 on $an!ary 26 and o!r Swing Low at

.%"5# a (ew days later on Febr!ary 2. &he retracement levels are .%9%% +2%.6,-) .%9"%

+%".2,-) .#2% +5.,-) .#6# +6.",- and .## +*6.#,-.

&he e0pectation (or a downtrend is that i( price retraces (rom this low) it will enco!nter resistance

at one o( the Fibonacci levels beca!se traders will be ready with sell orders there.

Let4s take a look at what happened ne0t.


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>owGa" isnt that a thing of beautyB(

*he market did try to rally" stalled below the 0.H level for a bit before testing the /+.+H level. $f

you had some orders either at the 0.H or /+.+H levels" you wouldve made some mad %i%s on that

trade.

$n these two exam%les" we see that %ricefound

some tem%orary su%%ort or resistance at Fibonacciretracement levels. ?ecause of all the %eo%le who use the Fibonacci tool" those levels become self-

fulfilling su%%ort and resistancelevels.

7ne thing you should take note of is that %rice wont always bounce from these levels. *hey should be

looked at as areas of interest" or as Dyclo%i%likes to call them" '/0&& 23'4) Well teach you more

about that later on.

For now" theres something you should always remember about using the Fibonacci tool and its that

they are not always sim%le to use( $f they were that sim%le" traders would always %lace their orders at

Fib levels and the markets would trend forever.

$n the next lesson" well show you what can ha%%en when Fibonacci levels fail.

When Fibonacci Fais

?ack in Erade ," we said that su%%ort and resistance levels eventually break. Well" seeing as how

Fibonacci levels are used to find su%%ort and resistance levels" this also a%%lies to Fibonacci(

!ow" lets go through an exam%le when the Fibonacci retracement tool fails.
http://www.babypips.com/school/support-and-resistance.htmlhttp://www.babypips.com/blogs/currency-cross-eyed/http://www.babypips.com/blogs/currency-cross-eyed/http://www.babypips.com/school/support-and-resistance.htmlhttp://www.babypips.com/blogs/currency-cross-eyed/


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?elow is a 1-hour chart of E?Iou use the @wing &igh at ,./0" with a swing low at ,.1=22.

>ou see that the %air has been stalling at the /+.+H level for the %ast cou%le of candles.

>ou say to yourself" '7h man" that /+.+H Fib level( $ts holding baby( *ime to short this sucka()

>ou short at market and start day dreaming that youll be driving down Jodeo Crive in your new

Aaserati with @carlett Kohansson 4or if youre a lady trader" Jobert Iattinson5 in the %assenger seat

!ow" if you really did %ut an order at that level" not only would your dreams go u% in smoke" but your

account would take a serious hit if you didnt manage your risk %ro%erly(

*ake a look at what ha%%ened.


8/26

$t turns out that that @wing Low was the bottom of the downtrend and market began to rally above

the @wing &igh %oint.

Whats the lesson hereB

Whie Fibonacci e#es gi#e you a higher probabiity of success, i*e other technica toos,

they don+t aways wor*. 5ou don+t *now if price wi re#erse to the !8.) e#e before

resuming the trend.

ometimes it may hit $(.( or the 61.8 e#es before turning around. -ec*, sometimes

price wi 7ust ignore r. Fibonacci and bow past a the e#es 7ust i*e how &ebron 9ames

buies his way through the ane with sheer force.

%emember, the mar*et wi not aways resume its uptrend after finding temporary support

or resistance, but instead continue to go past the recent wing -igh or &ow.

Another common probem in using the Fibonacci too is determining which wing &ow and

wing -igh to use.

Ieo%le look at charts differently" look at different time frames" and have their own fundamental biases.

$t is likely that @te%hen from Ii%buktu and the girl from Ii%anema have different ideas of where the

@wing &igh and @wing Low %oints should be.

*he bottom line is that there is no absolute right way to do it" es%ecially when the trend on the chart

isnt so clear. @ometimes it becomes a guessing game.

*hats why you need to hone your skills and combine the Fibonacci tool with other tools in your forex

toolbox to hel% give you a higher %robability of success.

$n the next lesson" well show you how to use the Fibonacci tool in combination with other forms of

su%%ort and resistance levels and candlesticks.


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Combining Fibs with upport and esistance

Like we said in the previo!s section) !sing Fibonacci levels can be very s!bobe 8ryant. >obe is one o( the greatest basketball

players o( all time) b!t even he co!ldn4t win those titles by himsel(. He needs some back!p.

Similarly) the Fibonacci tool sho!ld be !sed in combination with other tools. n this section) let4s

take what yo!4ve learned so (ar and try to combine them to help !s spot some sweet trade

set!ps.

Are y4all ready? Let4s get this pip show on the road'

@ne o( the best ways to !se the Fibonacci tool is to spot potentials!pport and resistancelevels

and see i( they line !p with Fibonacci retracement levels.

( Fib levels are already s!pport and resistance levels) and yo! combine them with other price

areas that a lot o( other traders are watching) then the chances o( price bo!ncing (rom those

areas are m!ch higher.

Let4s look at an e0ample o( how yo! can combine s!pport and resistance levels with Fib levels.

8elow is a daily chart o( 1S37HF.
http://www.babypips.com/school/support-and-resistance.htmlhttp://www.babypips.com/school/support-and-resistance.htmlhttp://www.babypips.com/school/support-and-resistance.html


10/26

As yo! can see) it4s been on an !ptrend recently. Look at all those green candles' o! decide

that yo! want to get in on this long 1S37HF bandwagon.

8!t the B!estion is) C=hen do yo! enter?D o! b!st o!t the Fibonacci tool) !sing the low at

.%2 on $an!ary (or the Swing Low and the high at ."99 on Febr!ary 9 (or the Swing

High.

/ow yo!r chart looks pretty sweet with all those Fib levels.

/ow that we have a (ramework to increase o!r probability o( (inding solid entry) we can answer

the B!estion C=here sho!ld yo! enter?D

o! look back a little bit and yo! see that the .5 price was good resistance level in the past

and it

t!rn into s!pport and be a good place to b!y.


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( yo! did set an order somewhere aro!nd the 5., Fib level) yo!4d be a pretty happy camper'

&here wo!ld have been some pretty tense moments) especially on the second test o( the

s!pport level on April . rice tried to pierce thro!gh the s!pport level) b!t (ailed to close below

it. :vent!ally) the pair broke past the Swing High and res!med its !ptrend.

o! can do the same set!p on a downtrend as well. &he point is yo! sho!ld look (or price levels

that seem to have been areas o( interest in the past. ( yo! think abo!t it) there4s a higher

chance that price will bo!nce (rom these levels.

=hy?

First) as we disc!ssed in Erade ) previo!s s!pport or resistance levels wo!ld be good areas to

b!y or sell beca!se other traders will also be eyeing these levels like a hawk.

Second) since we know that a lot o( traders also !se the Fibonacci tool) they may be looking to

=ith traders looking at the same s!pport and resistance levels) there4s a good chance that there

are a ton o( orders at those price levels.

=hile there4s no g!arantee that price will bo!nce (rom those levels) at least yo! can be more

con(ident abo!t yo!r trade. A(ter all) there is strength in n!mbers'

;emember that trading is all abo!t probabilities. ( yo! stick to those higher probability trades)

then there4s a better chance o( coming o!t ahead in the long r!n.

Combining Fibs with "rend #ines


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Another good tool to combine with the Fibonacci tool is trend lineanalysis. A(ter all) Fibonacci

levels work best when the market is trending) so this makes a lot o( sense'

;emember that whenever a pair is in a downtrend or !ptrend) traders !se Fibonacci

retracement levels as a way to get in on the trend. So why not look (or levels where Fib levels

line !p right smack with the trend?

Here4s a ho!r chart o( A13$. As yo! can see) price has been respecting a short term rising

trend line over the past co!ple o( days.

o! think to yo!rsel() CHmm) that4s a sweet !ptrend right there. wanna b!y A13$) even i(

it4s

8e(ore yo! do that tho!gh) why don4t yo! reach (or yo!r (ore0 tool bo0 and get that Fibonacci

tool o!t? Let4s see i( we can get a more e0act entry price.
http://www.babypips.com/school/trend-lines.htmlhttp://www.babypips.com/school/trend-lines.html


13/26

Here we plotted the Fibonacci retracement levels by !sing the Swing low at "2.6 and the

Swing High at "%."#.

/otice how the 5., and 6.", Fib levels are intersected by the rising trend line.

7o!ld these levels serve as potential s!pport levels? &here4s only one way to (ind o!t'


14/26

E!ess what? &he 6.", Fib level held) as price bo!nced there be(ore heading back !p. ( yo!

had set some orders at that level) yo! wo!ld have had a per(ect entry'

A co!ple o( ho!rs a(ter to!ching the trend line) price oomed !p like Astroboy on ;ed 8!ll)

b!rsting thro!gh the Swing High.

Aren4t yo! glad yo!4ve got this in yo!r (ore0 toolbo0 now?

As yo! can see) it does pay to make !se o( the Fibonacci tool) even i( yo!4re planning to enter

on a retest o( the trend line. &he combination o( both a diagonal and a horiontal s!pport or

resistancelevel co!ld mean that other traders are eying those levels as well.

&ake note tho!gh) as with other drawing tools) drawing trend lines can also get pretty s!b


15/26

&he pair seems to have been in a downtrend the past week) b!t the move seems to have

pa!sed (or a bit. =ill there be a chance to get in on this downtrend? o! know what this means.

t4s time to take the Fibonacci tool and get to work'

As yo! can see (rom the chart) we4ve set o!r Swing High at .%%6# on arch %) with the Swing

Low at .252% on arch 6.

Since it4s a Friday) yo! decided to

wanna enter once yo! see the charts a(ter the weekend.


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=hoa' 8y the time yo! popped open yo!r charts) yo! see that :1;31S has shot !p B!ite a bit

(rom its Friday closing price.

=hile the 5., Fib level held (or a bit) b!yers event!ally took the pair higher. o! decide to

wait and see whether the 6.", Fib level holds. A(ter all) the last candle was pretty b!llish' =ho

knows) price


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( yo! had shorted right a(ter that do


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Fibonacci &tensions

&he ne0t !se o( Fibonacci will be !sing them to (ind targets.

Eotta always keep in mind CIombieland ;!les o( S!rvival J22K G =hen in do!bt) know yo!r wayo!t' Let4s start with an e0ample in an !ptrend.

n an !ptrend) the general idea is to take pro(its on a long trade at a Fibonacci rice :0tension

Level. o! determine the Fibonacci e0tension levels by !sing three mo!se clicks.

First) click on a signi(icant Swing Low) then drag yo!r c!rsor and click on the most recent Swing

High. Finally) drag yo!r c!rsor back down and click on any o( the retracement levels.

&his will display each o( the rice :0tension Levels showing both the ratio and corresponding

price levels. retty neat) h!h?

Let4s go back to that e0ample with the 1S37HF chart we showed yo! in the previo!s lesson.

&he 5., Fib level held strongly as s!pport and) a(ter three tests) the pair (inally res!med its

!ptrend. n the chart above) yo! can even see price rise above the previo!s Swing High.

Let4s pop on the Fibonacci e0tension tool to see where wo!ld have been a good place to take

o(( some pro(its.


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Here4s a recap o( what happened a(ter the retracement Swing Low occ!rred

rice rallied all the way to the 6.", level) which lined !p closely with the previo!s

Swing High.

t (ell back to the %".2, level) where it (o!nd s!pport

rice then rallied and (o!nd resistance at the , level.

A co!ple o( days later) price rallied yet again be(ore (inding resistance at the 6.",level.

As yo! can see (rom the e0ample) the 6.",) , and 6.", levels all wo!ld have been

good places to take o(( some pro(its.

/ow) let4s take a look at an e0ample o( !sing Fibonacci e0tension levels in a downtrend.

n a downtrend) the general idea is to take pro(its on a short trade at a Fibonacci e0tension level

since the market o(ten (inds s!pport at these levels.


20/26

Let4s take another look at that downtrend on the ho!r :1;31S chart we showed yo! in the

Fib Sticks lesson.

Here) we saw a do
http://www.babypips.com/school/basic-candlestick-patterns.htmlhttp://www.babypips.com/school/basic-candlestick-patterns.html


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Here4s what happened a(ter price reversed (rom the Fibonacci retracement level

rice (o!nd s!pport at the %".2, level

&he 5., level held as initial s!pport) then became an area o( interest

&he 6.", level also became an area o( interest) be(ore price shot down to test the

previo!s Swing Low

( yo! look ahead) yo!4ll (ind o!t that the , e0tension level also acted as s!pport

=e co!ld have taken o(( pro(its at the %".2,) 5.,) or 6.", levels. All these levels acted as

s!pport) possibly beca!se other traders were keeping an eye o!t (or these levels (or pro(it

taking as well.

&he e0amples ill!strate that price (inds at least some temporary s!pport or resistanceat the

Fibonacci e0tension levels G not always) b!t o(ten eno!gh to correctly ad

take pro(its and manage yo!r risk.

@( co!rse) there are some problems to deal with here.

First) there is no way to know which e0act Fibonacci e0tension level will provide resistance. Any

o( these levels may or may not act as s!pport or resistance.
http://www.babypips.com/school/support-and-resistance.htmlhttp://www.babypips.com/school/support-and-resistance.html


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Another problem is determining which Swing Low to start (rom in creating the Fibonacci

e0tension levels.

@ne way is (rom the last Swing Low as we did in the e0amplesM another is (rom the lowest

Swing Low o( the past % bars. Again) the point is that there is no one right way to do it) b!t with

a lot o( practice) yo!4ll make better decisions o( picking Swing points.

o! will have to !se yo!r discretion in !sing the Fibonacci e0tension tool. o! will have to

how m!ch longer the trend will contin!e. Later on) we will teach yo! methods to help yo!

determine the strength o( a trend.

For now) let4s move on to stop loss placement'

'lacing tops with Fibs

robably

place yo!r stop loss.

o! can4t

acco!nt will

talian.

n this lesson) yo!4ll learn a co!ple o( techniB!es to set yo!r stops when yo! decide to !se them

tr!sty Fib levels. &hese are simple ways to set yo!r stop and the rationale behind each method.

&he (irst method is to set yo!r stop

( yo! were planning to enter at the %".2, Fib level) then yo! wo!ld place yo!r stop beyond the5., level. ( yo! (elt like the 5., level wo!ld hold) then yo!4d p!t yo!r stop past the 6.",

level and so on and so (orth. Simple) right?

Let4s take another look at that #ho!r :1;31S chart we showed yo! back in the Fibonacci

retracement lesson.


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( yo! had shorted at the 5.,) yo! co!ld have placed yo!r stop loss order


24/26

( the market price were to s!rpass the Swing High or Swing Low) it may indicate that a reversal

o( the trend is already in place. &his means that yo!r trade idea or set!p is already invalidated

and that yo!4re too late to

Setting larger stop losses wo!ld probably be best !sed (or longer term) swingtype trades) and

yo! can also incorporate this into a Cscaling inD method) which yo! will learn later on in this

co!rse.

@( co!rse) with a larger stop) yo! also have to remember to ad

accordingly.

( yo! tend to trade the same position sie) yo! may inc!r large losses) especially i( yo! enter at

one o( the earlier Fib levels.

&his can also lead to some !n(avorablerewardtoriskratios) as yo! may have a wide stop that

isn4t proportional to yo!r potential reward.

o which way is better(

&he tr!th is)

trend lines) and candlesticks to (ind a better entry) it wo!ld be best to !se yo!r knowledge o(

these tools to analye the c!rrent environment to help yo! pick a good stop loss point.

As m!ch as possible) yo! sho!ldn4t rely solely on Fib levels as s!pport and resistance points as

the basis (or stop loss placement.

;emember) stop loss placement isn4t a s!re thing) b!t i( yo! can tilt the odds in yo!r (avor by

combining m!ltiple tools) it co!ld help give yo! a better e0it point) more room (or yo!r trade to

breathe) and possibly a better rewardtorisk ratio trade.
http://www.babypips.com/school/what-is-scaling.htmlhttp://www.babypips.com/school/reward-to-risk-ratio.htmlhttp://www.babypips.com/school/reward-to-risk-ratio.htmlhttp://www.babypips.com/school/what-is-scaling.htmlhttp://www.babypips.com/school/reward-to-risk-ratio.html


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ummary) Fibonacci

&he key Fibonacci retracement levels to keep an eye on are the 2%.6,) %".2,) 5.,) 6.",)

and *6.#,. &he ones that seem to hold the most weight are the %".2,) 5.,) and 6.",

levels. &hese are normally incl!ded in the de(a!lt settings o( any Fibonacci retracement

so(tware.

( yo!r trading so(tware doesn4t have a Fib tool) no worries G we4ve got aFibonacci

calc!latorthat will do all the work (or yo!'

&raders !se the Fibonacci retracement levels as potential support and resistance. Since

plenty o( traders watch these same levels and place b!y and sell orders on them to enter trades

or place stops) the s!pport and resistance levels may become a sel((!l(illing prophecy.

&hey key Fibonacci e0tension levels are the %".2,) 5.,) 6.",) ,) %".2, and 6.",.

&raders !se the Fibonacci e0tension levels as potential s!pport and resistance areas to set

pro(it targets. Again) since so many traders are watching these levels and placing b!y and sell

orders to take pro(its) this tool tends to work d!e sel((!l(illing e0pectations.

n order to apply Fibonacci levels to yo!r charts) yo!4ll need to identi(y Swing High and Swing

Low points.
http://www.babypips.com/tools/forex-calculators/http://www.babypips.com/tools/forex-calculators/http://www.babypips.com/tools/forex-calculators/http://www.babypips.com/tools/forex-calculators/http://www.babypips.com/tools/forex-calculators/


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A Swing High is a candlestick with at least two lower highs on both the le(t and right o( itsel(.

A Swing Low is a candlestick with at least two higher lows on both the le(t and right o( itsel(.

8eca!se many traders !se the Fibonacci tool) those levels tend to become sel((!l(illing s!pport

and resistance levels or areas o( interest.

=hen !sing the Fibonacci tool) probability o( s!ccess co!ld increase when !sing the Fib tool

with other s!pport and resistance levels) trend lines) and candlestick patterns (or spotting entry

and stop loss points.

about fibonacci retracement

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