Fibonacci retracement is a technical analysis tool used to identify potential support and resistance levels based on key percentages derived from the Fibonacci sequence.
Fibonacci retracement works by drawing horizontal lines on a price chart at specific retracement levels, with 23.6%, 38.2%, 50.0%, 61.8%, and 161.8% (golden ratio) being the most popular Fibonacci ratios. Fibonacci retracement levels represent areas where the price might pull back (retrace) before continuing in the direction of the prevailing trend.
Traders use the Fibonacci retracement by identifying market trends, locating a swing high and swing low, applying the Fibonacci tool, analyzing key Fibonacci retracement levels, combining the Fibonacci retracement with other technical indicators like Moving Average, RSI, and MACD, and managing trade orders based on price reaction to different Fibonacci levels. The Fibonacci retracement tool is popular among Forex traders, stock traders, crypto traders, and commodity traders.
The benefits of Fibonacci retracement include the identification of potential support and resistance levels, being an objective tool for technical analysis, enhanced timing of entries and exits, confirmation of other technical analysis tools, risk management, and popularity among traders.
The risks of Fibonacci retracements include over-reliance, subjectivity, false signals, lack of confirmation, whipsaws, market sentiment shifts, and limited predictive power.
What is Fibonacci Retracement?
The Fibonacci retracement is a technical analysis tool used to identify potential levels of support and resistance in financial markets. The Fibonacci retracement levels are based on the mathematical Fibonacci sequence, where each number is the sum of the two preceding numbers.
The Fibonacci retracement utilizes specific percentage levels, such as 23.6%, 38.2%, 50%, 61.8%, and 100%, derived from ratios within the Fibonacci sequence. Traders utilize the Fibonacci retracement to predict possible price reversals or continuations during market trends. The Fibonacci retracement is often applied to both upward and downward trends to gauge correction levels. Fibonacci retracement is frequently used in Forex, stock, commodity, and cryptocurrency markets.
Traders use Fibonacci retracement to identify potential entry and exit points to open a market position. Traders apply Fibonacci retracement levels to a price chart by measuring the distance between a significant high and a significant low. Traders expect the price to retrace a portion of this range before continuing in the direction of the original trend. Traders commonly use the Fibonacci retracement levels of 38.2%, 50%, and 61.8% as potential areas of support or resistance.
The Fibonacci retracement tool is easily utilized through trading platforms by selecting the built-in Fibonacci retracement tool from the charting options. Most trading platforms provide this tool as part of their technical analysis suite. To use Fibonacci retracement, traders simply draw the tool from a significant high to a significant low (or vice versa) on the chart. The trading platform automatically generates horizontal lines at key Fibonacci levels, such as 23.6%, 38.2%, 50%, 61.8%, and 100%.
The Fibonacci retracement originates in ancient India between 700 BCE and 100 AD when the Fibonacci sequence of numbers was discovered and then developed by Mathematician Acarya Virahanka. Generations of Indian mathematicians like Hemacandra, Narayana Pandita, and Gopala referenced the Fibonacci retracement numbers in their works. Indian traders shared the concept of the Fibonacci sequence with Italian mathematician Leonardo Fibonacci. Leonardo Fibonacci introduced the Fibonacci sequence to Western Europe in the early 1200s through his book “Liber Abaci” (The Book of Calculation).
The application of the Fibonacci sequence in financial markets occurred in the 20th century through prominent traders like Ralph Nelson Elliott, the founder of Elliott Wave Theory in the 1930s, and Charles H. Dow, the founder of Dow theory, who found correlations between Fibonacci retracement levels and price behavior in the markets.
Market participants in “Forex trading training” are encouraged to combine Fibonacci retracement with other technical analysis tools and fundamental analysis techniques to confirm valid trade setups.
How does Fibonacci Retracement work?
Fibonacci retracement identifies potential levels of support or resistance in a price chart, where corrections or reversals might occur within a trend. Fibonacci retracement levels are created by taking two recent swing points (high and low) in a price chart, dividing the vertical distance by key Fibonacci ratios, and then drawing horizontal lines at these levels.
Swing high and swing low refer to key points in a price chart that defines the range for applying Fibonacci levels. The swing high is the highest point in the price movement before a retracement begins, while the swing low is the lowest point before the price reverses upward.
Fibonacci retracement levels identify potential support and resistance levels by indicating areas on the currency chart where price action may pause, reverse, or continue in the direction of the trend. Fibonacci retracement levels act as potential support levels, where price may pull back to and bounce up in bullish trends, or potential resistance levels, where price may rise briefly before continuing the downtrend.
Fibonacci retracement relies on the key levels 0.00%, 23.6%, 38.2%, 50%, 61.8%, 78.6%, and 100% to determine the extent of retracement or pullback to expect. Price pullbacks beyond the 50% level indicate a strong retracement and a potential reversal if the price moves beyond the 100% level. Price corrections between 0.00% and 50% indicate minor retracements and potential trend continuation if the price moves back above the 0.00% level.
Fibonacci retracement levels correspond with supply and demand zones in the market, and indicate areas on currency charts where large orders from institutional investors and other traders may accumulate. Supply zones forming around the 50% and 61.8% Fibonacci retracement levels typically indicate increased selling pressure of the tradable asset and are a valid confirmation of the end of a pullback in a bearish trend. Demand zones forming around the 50.0% and 61.8% levels indicate increased buying pressure in a financial instrument and confirm the end of a correction in a bullish market.
Fibonacci retracement takes advantage of the fact that many traders have a tendency to buy or sell currency pairs at retracement levels, creating major psychological zones that amplify the market’s reaction at some Fibonacci levels. Traders anticipate price reversals and trend continuations the deeper price moves into a Fibonacci retracement level.
What is the Golden Ratio in Fibonacci Retracement?
The golden ratio in Fibonacci retracement is the special mathematical constant 1.618 (1.618%). The golden ratio, also known as the Divine Proportion or Phi, is used to calculate key Fibonacci retracement levels like 23.6%, 38.2%, and 61.8%. The 50.0% Fibonacci retracement level is not derived from the golden ratio, but it is a popular support and resistance indicator. The Fibonacci Golden Ratio appears everywhere in financial markets, including Forex, stocks, cryptos, and commodities.
The golden ratio (1.618) is obtained by dividing one Fibonacci number by the next. For instance, the Fibonacci numbers include 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, and 233. Dividing 233/144 or 144/89 gives the result 1.618. The Fibonacci level of 61.8% is obtained by dividing one Fibonacci number by the next, e.g., 21/34 or 34/55, which results in 0.618. Traders frequently monitor the 61.8% retracement level as the ‘golden’ support or resistance zone, where markets will retrace before continuing with the trend.
The golden ratio is important in Fibonacci retracement because of its occurrence in various fields besides financial markets, including nature, arts, architecture, music, design, and human anatomy. Traders and investors believe that the golden ratio possesses psychological significance, contributing to its effectiveness, and this affects their behavior once the price pulls back to the retracement level. The golden ratio in Fibonacci retracement provides good entry and exit points for traders with stop-loss orders just beyond the 61.8% level.
Traders use the golden ratio to identify Fibonacci extensions, which help them set potential price targets and profit levels. Traders utilize the golden ratio in Fibonacci retracement when implementing mean reversion or harmonic pattern trading strategies.
What are the most popular Fibonacci Retracement Levels?
The most popular Fibonacci retracement levels are 38.2% and 61.8%. Other common Fibonacci retracement levels include 23.6%, 50.0%, and 78.6% since they help provide a clear representation of potential support and resistance zones when the price corrects or reverses a trend.
Traders use the 23.6% and 38.2% Fibonacci retracement levels to identify early retracements and potential continuation trades, and the 50.0% and 61.8% for deep retracements and precise entries and exits on trades.
The 23.6% Fibonacci retracement level indicates a minor pullback in a small trending market. Traders monitor the 23.6% level when looking for brief corrections in a highly volatile or fast-moving market, e.g., on major Forex pairs or stocks.
The 38.2% Fibonacci retracement level indicates moderate strength levels in a trend pullback. The 38.2% level is usually associated with sideways price movement or consolidation before the price continues with the underlying trend. Traders monitor the 38.2% Fibonacci retracement level to determine whether the pullback will continue further or the trend will continue. The 38.2% retracement indicates around 3/8 of the prior move from the swing low to the swing high.
50.0% is a popular Fibonacci retracement level that indicates a shift in investor sentiment and has more influence on the psychological aspect of trading. Traders use the 50% level to determine whether there is enough buying pressure or selling pressure to continue in the same direction or reverse. The 50% Fibonacci level is not derived from the Fibonacci sequence, but it acts as a key psychological point for trend-following and counter-trend traders.
The 61.8% Fibonacci retracement level, the ‘golden ratio,’ is widely regarded as the best Fibonacci retracement level because it represents the deepest retracement level during a pullback. Traders intensify their trading activity around the 61.8% retracement level, and this increases its importance as a psychological zone.
The 78.6% and 100.0% Fibonacci retracement levels are not as popular as other Fibonacci retracement levels because they often represent complete trend retracements or the confirmation of a trend reversal. Fib retracement levels beyond 61.8% have to be supported by technical indicators like moving averages, RSI, or candlestick patterns to confirm a potential trend continuation.
How is Fibonacci Retracement Calculated?
Fibonacci retracement is calculated by obtaining the ratio between two consecutive numbers in the Fibonacci sequence, a series of numbers where each number is the sum of the two preceding ones. Fibonacci series involves natural numbers 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc., and Traders calculate Fibonacci retracement levels by finding the ratios of the adjacent numbers, e.g., 55/89 results in 0.618 or 61.8%.
Traders calculate the 23.6% retracement level by dividing a number in the sequence by the number that’s two places ahead, e.g., 55/144 ≈ 0.236. The 38.2% fib retracement level is obtained by dividing a number in the sequence by the number that is three places ahead, e.g., 34 / 89 ≈ 0.382. 61.8% Fibonacci ratio is calculated by dividing a number in the sequence by the number that is one place ahead, e.g., 34 / 55 ≈ 0.618. The 78.6% fib retracement level is calculated by finding the reciprocal of the golden ratio (1.618) and then calculating the square root of the reciprocal, i.e., 1/1.618 = 0.618 and √ 0.618 ≈ 0.786.
The formula used for calculating Fibonacci retracement levels depends on the vertical distance and the trend direction of the market. The vertical distance is the distance between a swing high and a swing low point on a price chart.
The retracement level of 23.6% is calculated using the formula Retracement Level = Swing low + (Vertical distance × 0.236). The 38.2% Fibonacci retracement level is calculated using the formula Retracement Level = Swing low + (Vertical distance × 0.382). The 50.0% Fibonacci retracement level is calculated using the formula Retracement Level = Swing low + (Vertical distance × 0.500). The 61.8% Fibonacci retracement level is calculated using the formula Retracement Level = Swing low + (Vertical distance × 0.618). The 78.6% Fibonacci retracement level is calculated using the formula Retracement Level = Swing low + (Vertical distance × 0.786).
For instance, a Fibonacci retracement trader calculates the retracement levels on a EUR/USD price chart by identifying the swing low (say 1.1000) and swing high (say 1.2000). The vertical distance for EUR/USD is 0.1000 (1.2000 – 1.1000) for an uptrend. The calculations for the retracement levels become 1.1000+(0.1000×0.236) = 1.1236 (for the 23.6% retracement), 1.1000+(0.1000×0.382) = 1.1382 (for the 38.2% retracement), 1.1000+(0.1000×0.500) = 1.1500 (for the 50.0% retracement), and 1.1000+(0.1000×0.618) = 1.1618 (for the 61.8% retracement).
How to use Fibonacci Retracement?
Using the Fibonacci retracement tools involves the following steps.
- Identify market trends: Determine if the market is in an uptrend or downtrend before applying the Fibonacci retracement tool. Up-trending markets form a series of higher highs and higher lows, while down-trending markets form a series of lower highs and lower lows.
- Locate swing points: Choose two extreme points on the chart to form the recent swing high and recent swing low to use when measuring the Fibonacci retracement.
- Apply the Fibonacci retracement tool: Select the built-in Fibonacci tool from the toolbar of the online trading platform. The Fibonacci retracement tool is offered by most charting platforms like MetaTrader, TradingView, and cTrader. Click on the swing low for an uptrend, and the swing high for a downtrend, then drag the retracement tool to the swing high for an uptrend or to the swing low for a downtrend. The Fibonacci tool automatically calculates the retracement levels 23.6%, 38.2%, 50%, 61.8%, and 100% and plots a horizontal line for each level on the chart. Use manual calculation to apply the Fibonacci retracement tool if the online trading platform does not offer it. The formula for calculating Fibonacci retracement levels is Retracement level = Starting price – (Trend move * Fibonacci ratio).
- Analyze key Fibonacci levels: Use the plotted Fibonacci levels to identify potential areas of support and resistance. Different Fibonacci retracement levels indicate points in the chart where prices might reverse, consolidate, or continue the trend. Retracements into the 50.0%, 61.8%, or 78.6% provide good positions for placing buy or sell orders.
- Combine with technical indicators: Add confirmation confluences to the Fibonacci retracement trading strategy by incorporating technical indicators like the 50-day or 200-day Moving average, the Relative Strength Index (RSI) to identify overbought and oversold zones, and candlestick patterns such as dojis, engulfing candles, and hammers forming near retracement levels.
- Manage and adjust: Place trade orders after confirming the Fibonacci price level and include a stop-loss order and take-profit order for risk management. Continuously monitor market and price action changes and adjust the trading strategy based on changes in market conditions.
How is Fibonacci Retracement Used in Technical Analysis?
Fibonacci retracement is used in technical analysis to identify potential support and resistance levels during a price correction. Technical analysis traders use Fibonacci retracement levels to predict currency pair retracements, analyze the strength of a trend, confirm price reversals, anticipate trend continuations, and project the impact of news data on a currency chart.
Fibonacci retracement provides several support and resistance levels (23.6%, 38.2%, 50%, 61.8%, and 78.6%). Fibonacci retracement is used to increase the accuracy of technical analysis by providing specific key zones for traders to consider when analyzing currency market pullbacks.
Fibonacci retracement is utilized in technical analysis to determine the strength of a trend once a correction begins. Technical analysts look to combine price action with Fibonacci retracement levels to predict if a trend is strong and will continue, or weak and will reverse. Fibonacci retracement levels like 23.6% and 38.2% indicate a strong trend that’s likely to continue once the price bounces off the levels, while a deep retracement past the 50% level into 61.8% and 78.6% indicates a weak trend if the price completely retraces past the 100% Fibonacci level.
Fibonacci retracement levels are used to confirm trend reversals in technical analysis when the price breaks below a support or resistance zone and retraces below the 61.8% golden ratio zone. Traders compare the position of Fibonacci retracement levels relative to other technical analysis indicators, like the MACD, moving average, and RSI, to anticipate reversals in the market and improve their forecasting analysis.
Technical analysis utilizes Fibonacci retracement to project the expected price impact of heavy economic data or news releases like non-farm payroll, inflation data, and central bank interest rate policies on trading charts.
Fibonacci retracement enhances the “technical analysis definition” by allowing traders to extend the retracement levels beyond 100% to 127.2%, 161.8%, and 261.8%. The Fibonacci extensions enable traders to project price movement during periods of increased volatility.
How is Fibonacci Retracement used in Forex Trading?
Fibonacci retracement is used in Forex trading to identify ideal levels for placing entry orders and measuring price targets for exit points, set stop-loss and profit targets for risk management, enhance trading strategies using currency correlations, and identify key session retracement zones when market volatility is high.
Forex traders use Fibonacci retracement levels to identify the best levels for entry depending on the direction of a currency pair trend. Most Fibonacci traders look for entries at the 50% and 61.8% retracement levels, which align with strong support and resistance areas where the price is likely to bounce off and resume the trend. Fibonacci retracement levels indicate areas where traders anticipate reversals and continuations. The anticipation of reversals and continuations leads to a build-up of pending orders and the creation of new support or resistance levels.
Fibonacci retracement allows Forex traders to measure price movements during a trend to form the best take-profit levels when looking to exit a position. Forex trading makes use of Fibonacci retracement levels like 23.8% or 0.00% as potential exit points for small risk-reward trading strategies, and implement Fibonacci extensions like 127.2%, 161.8%, and 261.8% as potential take-profit levels for high risk-reward trading setups.
Fibonacci retracements are utilized in Forex trading to take advantage of currency correlations where price movement is similar in multiple currencies like EUR/USD and GBP/USD, which are positively correlated, or USD/CAD and EUR/USD, which are negatively correlated. For instance, Forex traders compare Fibonacci retracement levels in EUR/USD and USD/CAD to ensure that the support and resistance levels align and confirm the market trend or retracement.
Fibonacci retracements are used in Forex trading to help traders navigate through high intraday volatility that’s experienced across multiple trading sessions in the market. Fibonacci retracements enable market participants learning about Forex trading to identify potential pullback levels during the highly volatile Asian-London and London-New York overlap sessions.
How can Fibonacci Retracement be utilized in Forex Broker Platforms?
Fibonacci Retracement is utilized on Forex broker platforms to improve support and resistance recognition, enhance order execution directly from Fibonacci levels, and improve strategy customization. Forex broker platforms allow traders to use Fibonacci retracement to backtest on demo accounts and enable automation for algorithmic and high-frequency trading.
Fibonacci retracement is utilized by Forex traders on Forex broker platforms to improve recognition of support and resistance levels on price charts. Forex broker platforms like MetaTrader 4 (MT4), MetaTrader 5 (MT5), cTrader, and proprietary platforms (e.g., SaxoTrader, FOREX.com platforms) have easy-to-use Fibonacci retracement tools integrated into their charting software.
Forex trading platforms enable traders to access and engage in Forex trading by executing orders directly on Fibonacci retracement levels. The software behind Forex trading platforms incorporates multiple technical indicators like trendlines, oscillators like RSI, ATR, and MACD, and volume indicators that are used alongside the Fibonacci retracement tool to ensure traders have the right confirmation tools for executing long or short positions at precise price levels.
Trading platforms provided by top rated Forex brokers utilize Fibonacci retracement to enable traders to test and customize trading strategies on demo accounts and strategy tester tools. Forex traders access Fibonacci retracement on Forex broker platforms, applying it to historical data and simulated markets to understand how price reacts on different retracement levels and identify the levels that provide the best win-rate and risk-reward ratios for their strategies.
Which timeframe is Best for Fibonacci Retracement?
The best timeframe for Fibonacci retracement depends on the trader’s strategy, risk tolerance, market conditions, personal preferences, and time horizon. Experienced traders recommend a multi-timeframe approach when using Fibonacci retracement. In a multi-timeframe, traders combine higher timeframes like the daily, H4, and 1H with smaller timeframes like the 1 minute, 5 minutes, and 15 minutes.
Short-term traders like scalpers and day traders find the best Fibonacci retracement setups on lower timeframes such as 1-hour (H1), 30-minute (M30), or 15-minute (M15). Scalpers and high-frequency traders may look at the seconds to 1-minute chart to identify ideal Fibonacci retracement levels like the 38.2% or 50% for taking quick profits from multiple trades. Long-term traders like swing traders and position traders use the daily (D1) or weekly (W1) timeframe to identify a broad view of market trends and look for entries at the deeper Fibonacci retracement levels like the 61.8% golden ratio.
Traders choose an ideal Fibonacci retracement timeframe depending on their ability to handle risk. Risk-averse traders with a lower risk tolerance use the Fibonacci retracement tool on higher timeframes to take advantage of stable markets and lower volatility. Traders with high-risk tolerance use the Fibonacci retracement tool on lower timeframes that experience higher volatility and present many opportunities for placing trades.
The prevailing market conditions, such as trending or range-bound markets, determine the best timeframe for using Fibonacci retracement. Traders typically apply Fibonacci retracement to longer timeframes in trending markets, while using shorter timeframes in range-bound markets.
Using multiple timeframes offers the best approach to applying Fibonacci retracement because it allows traders to see a more comprehensive view of the market. Traders use top-down analysis, starting with a high timeframe like the daily chart to identify the overall trend and key retracement levels and then zooming in to a lower timeframe to perfect the entry and exit.
How can Fib Retracement be combined with other Technical Indicators?
Fibonacci retracement is combined with technical indicators like moving averages, momentum oscillators like RSI and MACD, pivot points, and candlestick patterns to enhance its effectiveness in identifying high-probability trades and improve traders’ accuracy in entries and exits. The Fibonacci retracement indicator is combined with other technical indicators to confirm trade signals and reduce the probability of false signals.
Traders combine the Fib retracement tool with trend indicators like moving averages (MA), Bollinger bands, and envelopes to determine trend directions and filter out the noise when confirming price pullback. The Fibonacci retracement tool indicates a strong area of support and resistance when it coincides with a significant moving average, such as the 50-day or 200-day MAs. For instance, a retracement to the 50% Fibonacci level that also touches the 50-day EMA in an uptrending EUR/USD pair offers a strong buying opportunity.
Fib retracement is combined with momentum oscillators like the relative strength index (RSI), moving average convergence/divergence (MACD), and the Stochastic oscillator to identify markets where the support and resistance zones align with an overbought or oversold market condition. Traders look for divergence between momentum indicators like the RSI and price action, then use Fibonacci retracement levels to identify good levels to enter trades. For example, a GBP/USD trader places trades in a downtrend if the price retraces to the 61.8% Fibonacci level and the RSI shows an oversold condition (below 30).
Fibonacci retracement is combined with candlestick patterns, such as dojis, engulfing candles, pin bars, and hammers, to confirm potential reversals or continuation signals at key support and resistance levels. For instance, a USD/JPY trader applies the Fibonacci retracement tool when the pair is in a downtrend, and looks for entries when the price retraces to a 61.8% retracement level, and forms a bearish engulfing candlestick pattern.
Traders use technical indicators like pivot points that work seamlessly with the Fibonacci indicator by providing an extra layer of confirmation when determining potential support and resistance zones. Fibonacci retracement levels that align with pivot points on higher timeframes create strong confluence zones where the price reaches and rejects, which provides powerful entry and exit points. For instance, traders looking for opportunities in a range-bound EUR/GBP pair may go long if the price retraces to the 50% Fibonacci level, which coincides with the daily pivot point.
What are the Benefits of Fibonacci Retracement?
The benefits of Fibonacci retracement are listed below.
- Identification of potential support and resistance level: Fibonacci retracement levels are easy to identify on any chart since most trading platforms provide a built-in tool with predefined levels and clear visuals.
- Objective tool for technical analysis: Fibonacci retracement ratios are derived from mathematical calculations and are not subject to human judgment, limiting the risk of personal bias or emotions in decision-making.
- Enhanced timing of entries and exits: Fibonacci retracement allows traders to identify potential support and resistance levels, which enable them to anticipate market reversals and execute trades at high-probability entry points.
- Confirmation of other technical analysis tools: Fibonacci retracement combines well with indicators like moving averages, RSI, ATR, MACD, and candlestick patterns, which enhance the effectiveness of trade signals and provide multiple confirmations before taking a trade.
- Risk management: Fibonacci retracement provides accurate levels that traders use to set stop-loss and take-profit targets. Traders use Fibonacci retracement levels to evaluate the risk-reward ratio of trades.
- Popular among traders: Fibonacci retracement levels are widely used by traders across different currency pairs and timeframes.
What are the Risks of Fibonacci Retracement?
The risks of Fibonacci retracement are listed below.
- Subjectivity: Fibonacci retracement effectiveness depends on a trader’s ability to identify correct swing high and swing low points in a trend. The variation in identifying swing points leads to different traders getting different results.
- Over-reliance: Fibonacci retracement leads to mechanical trading where traders follow fib signals blindly without considering other factors like fundamental and sentimental analysis.
- False signals: Fibonacci retracement does not guarantee support or resistance levels will hold. False signals occur frequently when the price breaks through support and resistance levels.
- Conflicting confirmation: Fibonacci retracement levels may provide trade signals that conflict with technical indicators like moving averages, where Fibonacci level suggests potential reversal while the moving average suggests trend continuation.
- Whipsaws: Fibonacci retracement does not account for whipsaws in volatile markets such as minor and exotic currency pairs. Whipsaws generate false signals, trigger stop-loss orders, and cause traders to exit trades prematurely as prices rapidly reverse.
- Limited predictive power: Fibonacci retracement shows similar statistical results in predicting potential support and resistance zones as other non-Fibonacci strategies. A study by Prodromos, Guijaro, and Nikolaos indicates a small difference in price behavior on Fibonacci levels and non-Fibonacci levels.
Is Fibonacci Retracement reliable?
Yes, the Fibonacci retracement tool is reliable when used as a guideline for identifying potential reversal (support and resistance) points in the market rather than a guarantee. Fibonacci retracement strategies vary in effectiveness, returns, and profitability depending on the market condition and trader’s experience. The reliability of Fibonacci retracements increases when combined with other technical indicators.
Retracements into the 50.0%, 61.8%, or 78.6% provide good positions for placing buy or sell orders, with a study by Tsinaslanidis, Prodromos, Francisco Guijarro, and Nikolaos Voukelatos (2022) titled “Automatic identification and evaluation of Fibonacci retracements: Empirical evidence from three equity markets” observing that there is a positive relationship between Fibonacci retracement zones and the probability of price bounces.
Fibonacci retracement tools are highly reliable in trending markets compared to sideways or choppy markets. Traders generate higher returns in volatile trending markets, as observed by Sethi, N., Bhateja, N., Singh, J., & Mor, P. (2020, March) in their paper titled ‘Fibonacci retracement in stock market.’ Sethi et al. noted that in 2018, two major uptrends had a return of nearly 73% on the investment. Fibonacci retracement is less effective in sideways markets since rapid price fluctuates around Fibonacci levels without showing any clear reversals or pullbacks.
Fibonacci retracement is more reliable with some trading strategies and struggles with other trading styles. Studies by Yi-Chang Chen et .al (2018) on ‘Constructing Trading Strategies According to Fibonacci Sequence’ found that Fibonacci retracement strategies have a high return in short-term strategies, but struggle to beat the market in the long run, which means that short-term traders like scalpers and intra-day traders find the tool more reliable than swing and position traders. Yi-Chang Chen’s paper indicates that traders have a higher probability of making profits using the Fibonacci retracement in rising markets (80% – 100%) than in big drops in markets (25% – 45%).
Combining Fibonacci retracement with technical indicators like moving average, RSI, and Bollinger Bands offers the highest reliability for traders. According to Sethi et al. (2020) paper ‘Fibonacci retracement in stock market,’ Fibonacci levels are simply numerical ratios without a logical foundation behind them, which means that traders combining the Fibonacci retracement tool with their experience and technical indicators get the best of the retracement tool.
Is Fibonacci Retracement worth it?
Yes, the Fibonacci retracement is worth it for traders who rely on technical analysis to trade trending markets. Fibonacci retracement makes it easy to identify potential support and resistance levels and time trade entries, but it is not foolproof and requires other technical indicators to increase accuracy.
Fibonacci retracement is accessible on online trading platforms like MetaTrader 4/5 and cTrader and is simple to apply and interpret. Online traders use the Fib retracement on multiple timeframes and identify areas where price might pull back before continuing upward easily, making it easier to predict market movements.
Fibonacci retracements offer a psychological edge to market participants since traders tend to make decisions around the retracement levels. Tradable assets have a higher chance of correcting to the 50% or 61.8% retracement level because of the psychological significance imposed by traders at these levels. Fibonacci retracements are worth it for traders because retracement levels create liquidity pools that enable the buying and selling of currency pairs in uncertain market conditions.
Fibonacci retracements are not worth it for traders who rely on the tool alone to make decisions. All trading indicators rely on historical data to predict market movement. Fibonacci indicators provide lagging information and miss the leading information provided by fundamental data. Trading Fibonacci retracement strategies is only worth it when combined with other technical and fundamental indicators on multiple timeframes, covering both higher timeframes and dropping down to the lower entries for entries.