Charts and indicatorsUpdated 2 min readBy the FXNOD team
Fibonacci retracement: levels, how to draw it, and does it work
Fibonacci retracement divides a price move into levels at 23.6%, 38.2%, 50%, 61.8% and 78.6%, where traders watch for a pullback to pause. You draw it from the start of a move to its end. The levels have no force of their own. They work to the extent that many traders watch them and that they line up with other levels.
The levels
| Level | Where it comes from | Pullback is |
|---|---|---|
| 23.6% | A ratio in the Fibonacci sequence | Shallow |
| 38.2% | A ratio in the Fibonacci sequence | Moderate |
| 50% | Not a Fibonacci ratio; included by convention | Half the move |
| 61.8% | The golden ratio | Deep |
| 78.6% | Square root of 0.618 | Very deep |
How to draw it
Find a clear move
A swing low to a swing high in an uptrend, or high to low in a downtrend.
Anchor the tool
From the start of the move to its end.
Read the levels in between
They mark how much of the move a pullback has given back.
Look for agreement
A level that sits on previous support or resistance matters more than one in empty space.
A worked example
A market rises from 100 to 150, a move of 50. The 38.2% retracement is 150 minus 19.1, or 130.9. The 50% level is 125. The 61.8% level is 150 minus 30.9, or 119.1. A trader looking to buy the pullback watches those three prices.
Does it work?
With five levels spread across a move, the price will turn near one of them most of the time by chance alone. That makes the tool look more accurate in hindsight than it is in advance: nobody tells you beforehand which level will hold. Its honest use is as a map of where a reaction is plausible, to be confirmed by what the price does there.
Retracement and extension
Retracement levels sit inside the move and are used for entries. Extension levels, such as 127.2% and 161.8%, project beyond it and are used as targets. They are drawn from the same anchors.
On synthetic indices
Fibonacci levels depend on other traders acting at them. A random index has no participants setting the price, so the levels are lines on a chart with no mechanism behind them.
Questions people ask
- What is the most important Fibonacci level?
- 61.8%, the golden ratio, gets the most attention, along with 50%. Neither is reliable alone.
- Is 50% a Fibonacci number?
- No. It is included by convention because markets often retrace about half a move.
- Do I draw Fibonacci from wicks or bodies?
- Most traders use the wicks, the true high and low. Be consistent whichever you choose.
Put it on a chart
Trade Pilot's chart has moving averages, RSI and Bollinger Bands, and a bot in Bot Forge can use indicators to choose its side. Try both on your Deriv demo account.
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