Drawing Fibonacci Retracement Areas in Upwards & Downwards Trend

The price of a currency pair does not move upwards or downwards in a straight line. Instead it moves upwards or downwards in a zigzag manner. Fibonacci Retracement is the trading tool used to calculate/estimate where the zigzag will stop. The pull back levels are 38.2 %, 50% & 61.8%. These form the points at which the market price is likely to make a retracement.

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

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

The diagram below shows movement in an upward market.

Retracement on upwards trend - Fibonacci Retracement on Upwards Forex Trend & Down-wards Forex Trend

1-2: Price moves up

2-3: Pull back

3-4: Moves up

4-5: Pull-back

5-6: Moves up

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

The answer is we use Fib retracement indicator.

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

What are The Retracement Levels

23.6%
38.2 %
50.0%
61.8 %

38.2% and 50.0% Levels are the most used & most times this is where the pull back will reach. With 38.2% being the most popular/liked & most widely used.

61.80% is also often used to set stop loss orders for trade positions opened using this trading strategy.

This tool will be drawn in direction of the trend as expounded in the exemplification below.

How to Draw on an Upward Bullish Market

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

Because we know this is just a pull back based on our using this indicator, we put a buy order just between the levels 38.2% & 50.0% and our stop loss just below 61.80 % retracement mark. If you had put a buy trade at this point in the trade example below you'd have made a lot of pips.

Fibonacci Drawn on Upward Trend - Fibonacci Retracement on Upward Trend & Down-wards Trend

Explanation for the Above Trading Example

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

23.60% provides minimum support & isn't 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 & in this example, this was the ideal place to set a buy trade order.

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

How to Draw on a Downwards Bearish Market

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

Because we know this is just a pull back we put a sell order at 38.20 % level and a stop loss order just above 61.80%.

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

Fibonacci Tool Drawn on Downward Trend - Fibonacci Retracement Areas on Upward Trend & Down-wards Trend

Explanation for the Above Forex Trading Example

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

This level provided a lot of resistance for the pullback, this was the best place for a trader to place a sell limit pending as the market quickly headed down after hitting and touching this technical level.

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