Fibonacci Retracement

Fibonacci retracement/expansion are extremely important tools for trading financial instruments and as such, there are many strategies that use them. Coming from the great mathematician Leonardo Fibonacci, the famous number series is both additive, as each number is the sum of the previous two, and multiplicative, as each number approximates the previous number multiplied by the golden section ratio.

Technical analysis would be less exact of a science without the Fibonacci sequence, and Metatrader platform offers a dedicated tab for the Fibonacci Retracement, Time Zones, Fan, Arcs, and Expansion. For the purpose of my analysis, I am gonna introduce to you the most important and widely used ratios, the retracement and expansion.

Fibonacci retracement it is used in finding support/resistance areas/levels when traders try to either buy the dip/sell the spike, that is finding better places to enter/re-enter a trend at lower/higher levels, or in identifying the possible turning point in a downward/upward trend. It is being widely used on all time-frames, so even if you’re a scalper that looks only at smaller time frames like five minutes chart, you’ll still find this tool extremely useful. It is being extremely useful for those who analyze charts using Elliott waves theory, as the relationship between the difference waves is highly based on different Fibonacci retracement levels and depending on the retracement level, waves can be classified accordingly.

The most important levels used in technical analysis are the 38.2%, 50% and 61.8% retracement levels. Depending on what you are using the Fibonacci retracement tool for, there are different levels of importance according to the strategy a trader uses, and here are a couple of examples: if you count waves using Elliott Waves Theory, then the 61.8% and 31.8% levels are mostly used, because they may signal the end of a possible second wave correction, respectively a third wave correction; if you think price is consolidating in a contracting triangle, for example, then look for retracements higher that 71.8% as legs of a triangle are retraced a lot; if you for whatever the reason use some sort of harmonic patterns, then you should look for 78% retracement level as being the most watched for traders using this kind of patterns. And there are many more different examples.

The recording shows you were to find the Fibonacci retracement tool on the Metatrader platform, how to customize it (add levels according to your interests, preferred colors, etc) as well as a few practical examples on different time frames.

Book recommendation: Constance Brown, “Fibonacci Analysis”, Bloomberg Market Essentials
Constance Brown, “Fibonacci Analysis”, Bloomberg Market Essentials