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 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.
Fibonacci retracement Levels is one of the many aspects of Forex technical analysis, it 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.
What Are The Fibonacci Retracement Levels
- 23.6 %
- 38.2 % fibonacci retracement level
- 50.0 % fibonacci retracement level
The 38.2 % and 50.0 % Fibonacci retracement levels are the most used levels and most of the time this is where the price will reach. 38.2% level is the most popular and most widely used.
To calculate these pullbacks on the chart for example the MetaTrader 4 we use retracement levels tool/indicator as shown on the image below.
Drawing this Fibonacci Retracement indicator on MetaTrader 4
Fibonacci Tool on 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.
Example of how to draw Fibonacci retracement levels
How to Draw Fibonacci Retracement Levels on a Currency Chart
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 we put a buy order just between 38.2% and 50.0% levels and our stop loss just below 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.
Fibonacci Drawn on Upward Forex Trend
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 38.2% level and a stop loss just above 61.8% level.
If you had put sell at this 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.
Fibonacci Tool Drawn on Downward Forex Trend