TL;DR: Fibonacci retracement is a technical analysis tool. You draw from a low to a high (or the reverse) and the levels 38.2%, 50% and 61.8% show where a pullback might stop. It is a commonly used method, not a proven predictor.
What can you expect?
- Time per week
- About 3 to 5 hours a week for charts, planning and reviewing.
- Starting capital
- No fixed minimum. With small amounts, order costs and spread weigh heavily. Only use money you can afford to lose.
- Typical setbacks
- Levels the price goes through, strings of losing trades, different traders with different levels and drawings that look too good in hindsight.
- Costs
- Order costs, spread, currency costs, financing and overnight costs on leveraged products and possibly the cost of price data. Compare the costs of several brokers.
- Not suitable if…
- People who want a forecast, cannot bear losses or do not want to follow fixed rules. Beginners are better off practising in a demo first.
How it works
In Fibonacci retracement you draw levels between a low and a high of a price move. Those levels (23.6%, 38.2%, 50%, 61.8% and 78.6%) show how much of the move the price gives back. Many traders watch these levels as possible places where a pullback ends. That can make them self-fulfilling at times, but it is not a law of nature and there is no reliable evidence that the price turns there more often than at other levels. So use it as a tool for making a plan, with a stop-loss, and not as a forecast. This is education, not investment advice.
Core principles
- 1. Look for a clear trend with a clear low and high
- 2. Draw the levels from one end of that move to the other
- 3. Use the levels as zones to make a plan, not as certain turning points
- 4. Always use a stop-loss
Step-by- step plan
- 1
Find a clear move
Look for a price move with a recognisable low and high. Small, messy moves give few usable levels.
- 2
Draw the levels
Use the Fibonacci tool in your charting program. In an uptrend draw from low to high and in a downtrend from high to low. Your program then shows the levels.
- 3
Wait for a pullback to a zone
Set alerts at the levels and wait until the price gets there. A level alone is not a signal. Check whether it coincides with support, resistance or a moving average.
- 4
Wait for confirmation
Wait for a reversal candle or another sign that the pullback is ending before you enter. If no confirmation appears, skip the trade.
- 5
Plan stop-loss, targets and position size
Place your stop-loss beyond the next level or beyond the turning point. First target: the previous high or low. Calculate the ratio between risk and reward and your position size, with a fixed maximum risk per trade.
In detail
Where the numbers come from
The Fibonacci sequence (1, 1, 2, 3, 5, 8, 13, 21, ...) was described in Europe in 1202 by Leonardo of Pisa. Divide one number by the next and you approach 0.618. Divide by the number two places further and you approach 0.382. That is where the levels 38.2% and 61.8% come from. The 50% level is not a Fibonacci number but is used anyway, and 23.6% and 78.6% are derived from them.
That these ratios say anything about stock prices is an assumption. There is no reliable evidence for it. It mainly works because many traders look at the same levels.
The levels
If a price rises from €50 to €100, the move is €50. The 38.2% level is then at €100 − 0.382 × €50 = €80.90. The 50% level is at €75 and the 61.8% level at €69.10. Traders often see a shallow pullback (23.6% to 38.2%) as a sign of a strong trend and a deep one (61.8% to 78.6%) as a sign the trend is weakening. Those are rules of thumb, not laws.
How to draw them
In an uptrend, draw from the low to the high of the move. In a downtrend, draw from high to low. Choose clear turning points, not small fluctuations. Larger timeframes usually give clearer points. Different people choose different points and so get different levels. That is the weakness of the method.
Confirmation and risk
A level alone is not a signal. Many traders wait for confirmation, such as a reversal candle, and look for coinciding support or resistance or a moving average. Even then the price can go through the level.
Decide in advance your stop-loss, your target and your position size. That is the part you control yourself. The worked example below shows how.
- Able to recognise trends and turning points
- Basic knowledge of candlestick charts
- A fixed plan for risk per trade
- Charting program with Fibonacci tool
- Position-size tool
- Trading journal
- 01 There is a clear trend move with recognisable start and end points
- 02 The price pulls back to a zone, for example between 38.2% and 61.8%
- 03 Wait for confirmation, such as a reversal candle, before entering
- 04 Check whether the level coincides with support or resistance or a moving average
- 05 Calculate your risk and position size in advance
- 01 Place a stop-loss beyond the next level or beyond the low or high of the pullback
- 02 First target: the previous high or low
- 03 Second target (optional): an extension level such as 127.2% or 161.8%
- 04 Close or review the position if the price goes through your stop-loss
Worked example
Made-up worked example (not advice, not a forecast). A share rises from €50 (low) to €100 (high). The move is €100 − €50 = €50.
Formula: level = high − percentage × move.
| Level | Price |
|---|---|
| 38.2% | €80.90 |
| 50% | €75.00 |
| 61.8% | €69.10 |
| 78.6% | €60.70 |
Suppose the price falls back to €69.10 and forms a reversal candle. You enter at €69.10 and set your stop-loss at €60 (below the 78.6% level).
- Risk per share = €69.10 − €60 = €9.10
- First target = previous high €100, reward = €100 − €69.10 = €30.90
- Reward / risk = €30.90 / €9.10 = 3.4
- Maximum risk €100: €100 / €9.10 = 10.9, rounded down to 10 shares. Loss at the stop: 10 × €9.10 = €91. Gain at the target: 10 × €30.90 = €309.
The numbers are chosen to show the calculation. In reality the price can fall through €69.10 and €60. Then you lose the amount at the stop, or more on a gap. Spread and order costs come on top. An extension level of 127.2% lies at €50 + 1.272 × €50 = €113.60.
Hypothetical example, not advice.
Work it out yourself
Risks and risk management
- There is no reliable evidence that the price turns more often at Fibonacci levels
- The choice of start and end point is subjective: two traders draw different levels
- With many levels on the chart, the price will always fit one of them
- The price can go through all the levels
- Gaps and fast moves can run past your stop-loss
- Costs (spread, order costs) and financing costs on leveraged products
- Limit your risk per trade to a fixed, small part of your capital
Learn the basics
Key takeaways
- Fibonacci levels are a tool for making a plan, not a forecast.
- The outcome depends on which points you choose. Be consistent and write down your rules.
- Use the levels together with other information, such as support and resistance, and wait for confirmation.
- Always calculate the ratio between risk and reward and your position size before you enter.
Frequently asked questions
Which Fibonacci level works best? +
That cannot be established. The 61.8% level is the best known, but there is no reliable evidence that any particular level holds more often. The 50% level is not a true Fibonacci number. Treat the levels as zones and wait for confirmation.
How do I draw Fibonacci correctly on a chart? +
Choose a clear move and draw from the low to the high (uptrend) or the reverse (downtrend). Larger timeframes usually give clearer points. All common charting programs have a Fibonacci tool. Stick to a fixed method.
Does Fibonacci also work on crypto and forex? +
You can draw the levels on any market. That does not mean they work. In crypto and in leveraged currency trading, swings are large and you can lose more than your deposit. Crypto has no deposit guarantee. Use a small risk per trade and practise in a demo first.
Origin
General technique