Fibonacci retracement explained: ratios, drawing and entries
Fibonacci retracement shows where a pullback within a trend is likely to end. Learn the 38.2%, 50% and 61.8% levels, how to draw them and how to combine them with support and resistance.
Fibonacci takes its name from a mathematical sequence found throughout nature. For traders, though, it does one simple job: it helps estimate how far a pullback will go.
The key ratios
| Level | Meaning |
|---|---|
| 23.6% | Very shallow pullback; a very strong trend |
| 38.2% | Shallow pullback; common in strong trends |
| 50% | Not a Fibonacci ratio but an important psychological level |
| 61.8% | The golden ratio; the most used entry level |
| 78.6% | Deep pullback; the last chance before invalidation |
How to draw it
In an uptrend: drag the tool from the swing low (where the move started) to the swing high. The levels then sit on the pullback.
In a downtrend: drag from the high to the low.
The key is choosing the right swing: a clear, complete move on the timeframe you trade, not every small wiggle.
The golden zone
Most of our entries sit between 50% and 61.8%. That range balances a good price with a decent chance the trend continues. The stop usually goes beyond 78.6% or beyond the start of the swing.
Confluence
Fibonacci alone is not enough. A level is powerful when it lines up with:
- previous support or resistance
- a trendline or channel bottom
- a demand or supply zone
- a round number
Example: in a gold uptrend, a pullback to 61.8% right on a broken high that has turned into support, plus a confirming pin bar, is a classic setup.
Common mistakes
- Drawing Fibonacci on small, irrelevant swings
- Entering without confirmation just because price touched a number
- Moving the anchor points after a loss to make the analysis "fit"
Next, learn Fibonacci extensions for setting targets.
📘 This article summarises ideas from our book "Fibonacci Chart Strategy", with 22 chapters and 137 real before-and-after examples. To get the book, message us on Telegram @fibonacci_chart.
Got a question? Ask us on Telegram support @fibonacci_chart, and follow our daily analysis on the Telegram channel.
Trading financial markets involves risk. This article is educational and is not investment advice.
Forex and CFD trading carries a high level of risk due to leverage and you may lose more than your initial capital. Content on this site is educational and not investment advice.
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