How To Use Fibonacci Retracement

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The Fibonacci Retracement is a strong tool that helps to identify reversal points of price and predict continuation of trends. In this article you will learn how to use this magnificent tool in your trading.

The Fibonacci Retracement tool is designed to find spots that price is likely to retrace to, before continuing its trend. Retracements occur when price reaches a new high after a strong trend, and begins to turn back in the opposite direction. Usually the opposite movement is in low volume - signaling that this is not a true trend and only a pause, an exhaustion period before the continuation of the trend.

Fibonacci ratios are used to identify levels where retracement usually stops.
These are special ratios that were found to be related to various natural processes in life and nature. More thorough information about Fibonacci can be seen here.

Step 1: Trend
In order to identify places of retracement we must at first find a big, strong trend. It should be a continuous trade with few pauses.

Example:

Fig. 1: Strong trend.

Step 2: Retracement
Use the Fibonacci Retracement tool in your trading platform, and choose two points: The lowest point of the trend, and the highest point of the trend. After done so, various lines will appear on your screen. These are the places in which price is likely to retrace and stop in order to continue its trend in the original direction.

The two most powerful retracement ratios are: 23.6 and 38.2. These are levels that price is most likely to retrace to.

Example of the Fibonacci Retracement:

Fig. 2: After a strong trend, price stopped exactly at 23.6% retracement and 38.2% - and continued the uptrend

The Fibonacci Retracement also predicts reversal levels outside the range of the trend:

Fig. 3: After a strong trend, price began a retracement. Fibonacci ratios predicted a resistance level outside the range of the trend - 161.8% of the uptrend.

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