Drawing Fibonacci Retracement Levels on Upwards & Downward Trend

The price on a gold chart doesn't move up or down in a straight line. Instead it moves & heads upward or downward in a zigzag manner. Fibonacci Retracement is the tool used to calculate where the zigzag will stop. The pull-back levels are 38.2 %, 50 % & 61.8%. These form the points at which the market is likely to make a retracement.

What is retracement? It's a retracement of price before the market resumes the original trend/original and initial direction of movement.

Examples of Zigzag Movement: The Examples below shows price heading upwards in a zigzag manner.

The diagram below shows movement in an upward market.

1-2: Price moves up

2-3: Pull-back

3-4: Moves up

4-5: Pull back

5-6: Moves up

Since we can identify where a pull back starts on a chart, how do we know where it will reach?

The answer is we use Fibonacci retracement indicator.

This is a type of line study used in xauusd to predict & calculate these levels. This xauusd indicator is placed directly on the chart within the trading platform provided by your broker, This xauusd indicator will then automatically calculate these technical levels on the chart.

What are The Retracement Levels

• 23.6 %
• 38.2%
• 50.0 %
• 61.8%

38.20% and 50.00% Levels are the most used and most times this is where the pull-back will reach. With 38.20% being the most popular/liked & most widely used.

61.80 % is also oftenly used to set stops for trades opened using this strategy.

This tool will be drawn in the direction of the market trend as is explained on the examples presented below.

How to Draw on an Upwards Bullish Market

In the diagram below price is heading upward between 1 & 2 then after 2 it retraces downward to 50.00 % pull back area then it continues moving up in the original upwards trend. Notice that this technical indicator is plotted from point 1 to point 2 in the market direction of the market trend (Upward).

Because we know that this is just a pull back based on strategy of using this technical indicator, we put a buy order just between the areas 38.20% & 50.0% and our stoploss just below 61.80% retracement mark. If you had put buy at this point in the trade example shown & displayed below you would have made a lot of pips.

Explanation for the Above Example

Once the trade hit the 50.0 % level, this level provided a lot of support for price, and afterwards xauusd market then resumed the original up gold trend and continued to move upward.

23.6% provides minimum support and is not an ideal place to place an order.

38.2 % provides some support but price in this example continued to retrace upto the 50 % zone.

50.00% provides a lot of support and in this example, this was the ideal place to set a buy order.

For this illustration, the pull-back reached the 50.00% retracement area, but most of time the market will retrace upto 38.2 % and thenceforth most of the time traders set their buy limit orders at the 38.2 percentage level, & at the same time placing a stoploss just below 61.8%.

How to Draw on a Downward Bearish Market

In the diagram below the market is moving down between 1 and 2, then after 2 it retraces up to 38.20 % retracement then it continues heading downward in the original downwards trend. Notice that this technical indicator is plotted from point 1 to 2 in the market direction of the market trend (Downwards).

Because we know that this is just a retracement we put a sell order at 38.20% level & a stop loss just above 61.80%.

If you had put sell order at the 38.2% level such as displayed & shown on the trade below you would have made a lot of pips afterwards. In this trade the price retracement reached 38.20% point and did not get to 50.00% mark. From experience it's always good to use 38.2% because most times the pull-back doesn't always get to 50.0% mark.

Explanation for the Above Example

The above example is the perfect setup where the price retraces immediately after touching the 38.20% Level.

This area provided a lot of resistance for the pull-back, this was the best place for an investor to place a sell limit order as the market quickly moved down after getting to this level.

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