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Introduction to Fibonacci Retracement Levels

Fibonacci retracement is one of the most popular technical analysis tools used by traders to identify potential support and resistance levels.

The Golden Ratio​

Fibonacci numbers are a sequence where each number is the sum of the two preceding ones: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34...

The key ratios used in trading are:

  • 23.6% - Minor retracement
  • 38.2% - Shallow retracement
  • 50.0% - Psychological level (not a Fibonacci ratio)
  • 61.8% - The Golden Ratio
  • 78.6% - Deep retracement

How to Draw Fibonacci Levels​

  1. Identify a significant price move (swing high to swing low, or vice versa)
  2. In an uptrend: draw from swing low to swing high
  3. In a downtrend: draw from swing high to swing low
  4. The tool automatically plots horizontal lines at Fibonacci levels

Trading with Fibonacci Retracements​

Pullback Strategy​

  1. Wait for a strong trend to establish
  2. Wait for price to pull back to a Fibonacci level
  3. Look for confirmation signals (candlestick patterns, support/resistance)
  4. Enter in the direction of the main trend

Best Practices​

  • Combine with other technical indicators
  • Use on multiple timeframes for confluence
  • The 61.8% level is often the most reliable
  • Watch for price action around these levels

Common Mistakes to Avoid​

  • Drawing Fibonacci on insignificant moves
  • Ignoring the overall trend context
  • Using as the only decision-making tool
  • Not waiting for confirmation

Fibonacci Extensions​

Beyond retracements, Fibonacci extensions (127.2%, 161.8%, 261.8%) help identify profit targets when price breaks beyond the original move.

Conclusion​

Fibonacci retracement levels are a valuable tool in a trader's arsenal. When combined with proper risk management and other analysis techniques, they can significantly improve trading decisions.