Fibonacci retracement
A drawing tool that splits a price move into levels based on Fibonacci ratios, so you can see how far a pullback has gone.
What Fibonacci retracement is.
Horizontal levels that divide a price move by ratios taken from the Fibonacci sequence.
Markets rarely move in a straight line. After a strong move, price often gives back part of it before the trend carries on or fails.
Fibonacci retracement measures those pullbacks. You pick a swing low and a swing high, and the tool draws levels between them.
Each level marks a share of the move: 23.6%, 38.2%, 50%, 61.8% and 78.6%. Traders watch them as areas where a pullback could stall.
The ratios come from the Fibonacci sequence, which Leonardo of Pisa described in Europe in the 13th century. The 50% level is not a Fibonacci ratio, but traders watch it too.
How the levels are found.
Two points on the chart and a handful of ratios. The tool does the arithmetic.
Find a clear swing.
In an uptrend, pick a swing low and the swing high that followed it. In a downtrend, use a swing high and the low that followed.
Measure the move.
Subtract the low from the high. That distance is the full move, or 100%.
Apply each ratio.
Multiply the move by each ratio. In an uptrend, subtract each result from the high to get the levels.
Watch the levels.
If price pulls back, see how it behaves at each level, rather than assuming it will stop at any of them.
Level in an uptrend = swing high − (move × ratio)
Level in a downtrend = swing low + (move × ratio)
| Level | Where it comes from | How traders often view it |
|---|---|---|
| 23.6% | A number divided by the one three places later, such as 13 ÷ 55 | A shallow pullback in a strong trend |
| 38.2% | A number divided by the one two places later, such as 21 ÷ 55 | A moderate pullback |
| 50% | The halfway point; not a Fibonacci ratio | Watched because so many traders use it |
| 61.8% | A number divided by the next one, such as 34 ÷ 55 | A deep pullback, watched closely |
| 78.6% | The square root of 0.618 | A very deep pullback; the move may be failing |
A worked example: price rises from 1.1000 to 1.1200, a move of 200 pips. The 61.8% level is 1.1200 minus 124 pips, which is 1.1076.
How to read them.
Four ideas traders use. None of them is a signal on its own.
Shallow or deep.
A pullback that stalls near 23.6% or 38.2% shows buyers returned quickly. One that reaches 61.8% or beyond shows the trend has lost some momentum.
The 50% to 61.8% zone.
Many traders watch this area most closely. In the chart above, price stalls there before the uptrend resumes.
Confluence.
A Fibonacci level carries more weight for traders when it lines up with support, resistance or a moving average.
When levels fail.
If price closes beyond 78.6%, many traders see the original move as reversed rather than retraced.
Common mistakes.
Where traders new to Fibonacci retracement most often go wrong.
Choosing swing points that suit the answer you want. Use clear, obvious highs and lows that other traders would pick too.
Expecting price to stop exactly on a level. Treat each level as an area, as you would support and resistance.
Drawing levels on a choppy, sideways market. The tool measures pullbacks within a trend, so it needs a clear move first.
Forgetting that it can be self-fulfilling. Levels may matter partly because many traders watch them, and that can change at any time.
Using Fibonacci levels on their own. Traders usually look for a second reason, such as a candlestick pattern or a support level.
Using it on MetaTrader 5.
Fibonacci Retracement is one of MT5’s built-in drawing tools.
Open a chart.
In MetaTrader 5, open the instrument and a timeframe that shows a clear swing.
Choose the tool.
Go to Insert, then Objects, then Fibonacci, and choose Fibonacci Retracement.
Draw it across the swing.
In an uptrend, click on the swing low and drag to the swing high. In a downtrend, drag from the high to the low.
Edit the levels.
Right-click the object and open its properties. On the Levels tab you can add, remove or change ratios, such as 78.6%.
Questions, answered.
What traders ask most about Fibonacci retracement.
01Why is 50% included if it is not a Fibonacci ratio?
02Which swing points should I use?
03Does it work on every market?
04What are Fibonacci extensions?
05Can I practise with it first?
Practise it on a demo.
Draw Fibonacci levels on a free MT5 demo and watch how pullbacks behave around them before you trade with real money.
Trading CFDs on a live account puts your capital at risk and you can lose money. A demo does not.