The Fibonacci retracement tools are indeed important for traders in measuring the trends of the market, pinpoints of support and resistance, and optimal entries and exits for respective trades. However, novice traders often do not apply the sequence properly or cannot place the tool correctly.
Herein, this guide will look at how you could actually use the Fibonacci retracement in four easy steps. Going through this will equip you with an ability to trade confidently through multiple platforms and markets.
The Importance of Fibonacci Retracements?
What are Fibonacci retracements?
Fibonacci retracement is a technical analysis tool derived from the Fibonacci numbers. A number series ultimately develops from the Fibonacci numbers: 23.6%, 38.2%, 50%, 61.8%, and 78.6%, which has been developed and is used to measure prices for their probable movements and retracements. As such, think of the Fibonacci levels as a price tape measure, quantifying the robustness of any trend or a possible reversal.
The tool has two major functions:
- Identifying Trends: It determines whether the market is bullish, bearish, or neutral.
- Support and Resistance Zones: Decide on tangible levels that would be very helpful in making trading decisions.
How to draw:
Step 1: Place Fibonacci retracement tool properly
The first important step toward accurate Fibonacci levels, this will involve placing the starting and ending points of the retracement tool at the extremes of a price wave; in other words, it means taking the extreme highs and lows of any trend.
- In an uptrend: Draw from low to high.
- In a downtrend: Start at the high and drag to the low.
This ensures that the retracement levels really can show potential pullbacks or continuation points within the trend.
Pro Tip: Use Fibonacci retracements across all markets – Forex, stocks, crypto – on any timeframe for consistent results.
Step 2: Apply the Tool on MT4 and TradingView
On MetaTrader 4 (MT4):
- Click the Fibonacci retracement tool above the Market Watch window.
- Drag the tool from the swing high to the swing low, or vice-versa, depending on the trend.
- Adjust the levels higher/lower accordingly, whichever reflects price extremes.
On TradingView:
- Choose the Fibonacci retracement tool from the left-hand toolbar.
- Draw from low to high (uptrend), or from high to low (downtrend).
- By the settings menu, customize the levels and colors for more clarity.
You can customize the retracement levels on both platforms and insert them smoothly into your charts.
Step 3: Understand and Use Key Levels
The most important Fibonacci retracement levels are:
- 23.6%: Shows minor retracements; used in strong trends.
- 38.2%: A moderate retracement level; a common entry point.
- 50%: Not an official Fibonacci ratio but very well accepted as a psychological level.
- 61.8%: The “golden ratio” and a strong reversal point.
- 78.6%: This is a deep retracement level and can signal trend exhaustion.
Step 4: Combine Fibonacci Retracements with Other Indicators
Though Fibonacci retracements are powerful on their own, their combination with other tools will increase your trading accuracy:
- Momentum Oscillators: Stochastics, RSI, etc. Identify overbought and oversold conditions at Fibonacci Levels.
- Multiple Time Frames: Use retracements on higher time frames for trend context, lower time frames for exact entries.
- Candlestick Patterns: The confirmation signals may look something like engulfing patterns or pin bars that occur at the levels of retracement.
Trading Strategies Using Fibonacci Retracements
1. Trend Trading
- Identify the dominant trend—whether up or down.
- Use retracement levels to potentially enter during pullbacks.
For example, buy at the 38.2% or 61.8% retracement in a Bitcoin uptrend.
2. Range Trading
- Identify the boundaries of a ranging market using Fibonacci levels.
- Buy at the lower retracement level, such as the 38.2%, and sell at the upper level, such as 78.6%.
- Use it in combination with oscillators to confirm market equilibrium.
Real Life Examples
Bitcoin Weekly Chart (Trend Strategy)
- Draw Fibonacci retracements from the swing low to the swing high.
- Enter near the 38.2% or 61.8% retracement levels during a pullback.
- Confirm any oversold conditions at these levels using the stochastic oscillators.
USD/JPY Monthly Chart – Range Strategy
- Apply retracements based on the yearly trading range.
- Sell at the upper extreme—e.g., 137.25—and buy at the lower extreme—e.g., 132.66.
- Use oscillators to confirm equilibrium before entering trades.
Conclusion
How to effectively use the Fibonacci retracement tool comes down to proper application, understanding key levels, and combining it with other indicators. Whether you are trend or range trading, it can be a very valuable tool in enhancing your trading strategies.
Want to dive in? Launch your MT4 or TradingView right away and set the Fibonacci retracement tool. Trade smarter starting today.
