Fibonacci Retracement Levels on Upward and Downward Trend
The price of a currency pair does not move up or down in a straight line. Instead it moves up or down in a zigzag pattern. Fibonacci Retracement Levels is the tool used to calculate where the zigzag will stop. The Retracement levels are 38.2%, 50% and 61.8%, these points form the points at which price is likely to make a pullback and these levels are plotted automatically using the Fibonacci retracement tool that can be found on the MetaTrader 4 trading platform.
What is a Fibonacci retracement? It is a pullback of the price before the price resumes the original trend/original direction of movement. This tutorial will explain what a retracement is and how to draw Fibonacci retracement levels.
Example of Zigzag Price Movement: The Example below shows price moving up in a zigzag pattern.
The diagram below shows movement in an upward Forex trend.
1-2: Price moves up
2-3: Price Pullback
3-4: Price moves up
4-5: Price Pullback
5-6: Price moves up
Since we can spot where a retracement starts on a Forex chart, how do we know where it will reach?
The answer is we use Fibonacci retracement tool.
How To Use Fibonacci Retracement For Day Trading
Fibonacci retracement Levels is one of the many aspects of Forex technical analysis, Fibonacci retracement lines is a type of line study used in currency trading to predict and calculate price pullback levels. The Fibonacci is placed directly on the currency chart within the trading platform provided by your broker, This indicator will then automatically calculate these pullback levels on the chart. There is no need to look for an online Fibonacci retracement calculator neither do you require to know any Fibonacci formula; once the Fibonacci Retracement Levels Indicator on MT4 Software is placed on a chart, it will automatically calculate the Fibonacci Retracement Values
What Are The Fibonacci Retracement Levels
- 23.6 % Fibonacci Retracement Level
- 38.2 % Fibonacci Retracement Level
- 50.0 % Fibonacci Retracement Level
- 61.8% Fibonacci Retracement Level
The Fibonacci Retracement Levels 38.2 % and Fibonacci Retracement Levels 50.0 % are the most used levels and most of the time this is where the price will reach. Fibonacci Retracement Levels 38.2 % is the most popular and most widely used.
Fibonacci Retracement Levels 61.8% is also commonly used to set stops for trades opened using the Fibonacci Retracement Trading Strategy.
To calculate these pullbacks on the chart for example the MetaTrader 4 we use retracement levels tool/indicator as shown on the image below.
If you want to analyze some charts using this tool, it is already provided for in the MT4 platform, no need to download Fibonacci retracement tool online or download Fibonacci retracement calculator. The following procedure is used to add this tool on the MetaTrader 4 Software. On The MT4 this tool will automatically draw the Fibonacci levels on a chart once it is placed on the the Forex chart.
To add Fibonacci Retracement tool on the MetaTrader 4 Software, you can use the following shortcut method:
1. Click Insert
2. Click Fibonacci
3. Click Retracement
How to add Fibonacci Retracement tool on the MetaTrader 4 Software
How To Use Fibonacci Retracement In Forex Trading
After adding the Fibonacci retracement tool, this indicator can be accessed from "MetaTrader 4 Line Studies Tool Bar" as shown below.
Drawing this Fibonacci Retracement Indicator on MetaTrader 4
Fibonacci Tool on MetaTrader 4 - How To Use Fibonacci Retracement In MetaTrader 4
The Fibonacci retracement tool is located on MetaTrader 4 (Line Studies Toolbar), to go to this toolbar click "View" at the top left corner of MetaTrader 4 next to file, then click "Toolbars", Then Check "Line Studies". You can learn how to use it on the MetaTrader 4 using a demo practice account.
Below is an illustration of the Fibonacci retracement tool, we always plot the indicator between two points, point 1 and point 2, in the direction of the Forex trend as shown below.
Fibonacci Retracement Levels Indicator - Fibonacci Analysis
Fibonacci Retracement Levels Indicator MT4
Example of how to draw Fibonacci retracement levels
How to Draw Fibonacci Retracement Levels on a Currency Chart
How To Place Fibonacci Retracement on a Forex Trading Chart
To Place the Fibonacci retracement tool on a chart, click on the Fibonacci retracement button shown above on the MetaTrader 4 software. Then select 2 chart points, the first point is where the trend starts and the second point is where the trend pull back.
The Fibonacci retracement tool will be drawn in the direction of the trend as explained in the examples below using an upward trend and downward trend example.
How to Draw Fibonacci Retracement Levels on an Upward Forex Trend
In the diagram below the price is moving up between 1 and 2 then after 2 it retraces down to Fibonacci 50.0% price pullback level then it continues moving up in the original upward trend. Notice that this indicator is drawn from point 1 to point 2 in the direction of the Forex trend (Upward).
Because we know this is just a price pullback based on our using this Fibonacci retracement trading system, we put a buy order just between Fibonacci Retracement 38.2% and 50.0% levels and our stop loss just below Fibonacci 61.8% retracement level. If you had put a buy at this point in the trade example below you would have made a lot of pips.
How To Use Fibonacci Retracement In Forex Technical Analysis - Upward Trend
Fibonacci Drawn on Upward Forex Trend - Example of Trading Fibonacci Retracement Levels
Explanation for the Above Example - How To Use Fibonacci Retracement
Once the trade hit the 50.0 % Retracement Level, this level provided alot of support for the price, and afterwards the price then resumed the original up trend and continued to move up.
Fibonacci Retracement Levels 23.6 % provides minimum support and is not an ideal place to place an order.
Fibonacci Retracement Levels 38.2 % provides some support but price in this example continued to retrace up to the 50 % retracement level.
Fibonacci Retracement Levels 50.0 % provides a lot of support and in this example, this was the ideal place to place a buy order.
For this example, the price reached the retracement level 50.0 %, but most of the time price will retrace up to 38.2 % and therefore most of the time traders set their buy limit orders at the Fibonacci Retracement 38.2 % Level, while at the same time placing a stop just below Fibonacci Retracement 61.8 % Level
How to Draw Fibonacci Retracement on a Downward Forex Trend
In the diagram below the price is moving down between 1 and 2, then after 2 it retraces up to 38.2% retracement then it continues moving down in the original downward trend. Notice that this indicator is drawn from point 1 to point 2 in the direction of the Forex trend (Downward).
Because we know this is just a price pullback we put a sell order at Fibonacci 38.2% Retracement level and a stop loss just above Fibonacci 61.8% retracement level.
If you had put sell using this Fibonacci retracement trading system at the 38.2 % Fib Retracement point in the trade below you would have made a lot of pips afterwards. In this trade the retracement reached 38.2% point and did not get to 50.0% level. From experience it is always good to use 38.2% level because most times the price pullback does not always get to 50.0% level.
How To Use Fibonacci Retracement In Trading - Downward Trend
Fibonacci Tool Drawn on Downward Forex Trend - Fibonacci Retracement Forex Strategy
Explanation for the Above Example - Using Fibonacci Retracement Levels
The above example is the perfect setup for Fibonacci Forex Trading, where the price retraces immediately after touching the 38.2 % Retracement Level.
This level provided a lot of resistance for the price pull back, this was the best place for a trader to place a sell limit order.
The same Fibonacci Analysis can also be applied in Stocks trading and commodities trading such as trading of Silver and Gold commodities.
Using Fibonacci Retracement Tool Exercise and Practice
Fibonacci Technical Analysis Exercise: To further practice How To Use Fibonacci Retracement Tool and How To Use Fibonacci Expansion Tool and the difference between these two indicators used in Forex trading: Fibonacci Trading Exercises.
Meanwhile, Download MetaTrader 4 Platform and start using these Fibonacci retracements day trading techniques discussed above on this how to use Fibonacci retracement tutorial guide.
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