Drawing Fib Retracement Areas 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. Fib Retracement is the tool used to calculate where the zigzag will stop. The pullback 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 is a pullback of the price before the market resumes original trend/original direction of movement.

Example of Zigzag Movement: The Examples below shows price heading upward in a zigzag pattern.

The diagram below shows movement in an upwards market.

Retracement on upward trend - Fib Retracement on Upwards Forex Trend & Down-wards Forex Trend

1-2: Price moves up

2-3: Pullback

3-4: Moves up

4-5: Pullback

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 Fibonacci retracement tool.

This is a type of line study used in forex to predict and calculate these levels. This indicator is placed directly on the currency chart within the platform provided by your broker, This trading indicator will then automatically calculate these levels on the trading 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 of the time this is where the pull back will reach. With 38.2% being the most popular and most widely used.

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

This tool will be drawn in direction of the trend as explained in the example below.

How to Draw on an Upwards Bullish Market

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

Because we know this is just a pullback 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 % pullback mark. 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 Trend - Fibonacci Retracement on Upward Trend & Down-wards Trend

Explanation for the Above Trading Example

Once the trade hit the 50.0 percent% level, this zone provided a lot of support for the market price, & afterward market then resumed the original up trend & continued to move upwards.

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 up to 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 example, the pullback reached the 50.00% pullback area, but most of time the market will retrace up to 38.2 % and thenceforth most of the time traders set their buy limit pending orders at the 38.2 percent% level, while at the same time placing a stop just below 61.8%.

How to Draw on a Downwards Bearish Market

In the diagram below the market is moving down between 1 & 2, then after 2 it retraces upto 38.20 % retracement then it continues heading down in the original downward trend. Notice that this indicator is drawn from point 1 to point 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 as shown on the trade below you'd have made a lot of pips afterwards. In this trade the retracement reached 38.2% point & did not get to 50.00% mark. From experience it's always good to use 38.20% because most times the pullback 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 examples is the perfect setup where the market price retraces immediately after touching the 38.20% Level.

This zone 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 this level.

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