Fibonacci retracement is a tool that traders use quietly on a daily basis. It can be used to determine possible turnaround points in a market pullback—those times when prices pause or reverse to continue the primary trend.
Whether you are trading forex, stocks, or crypto, knowing how to use Fibonacci retracement levels can make a massive difference in deciding when to enter and exit.
Understanding How Fibonacci Retracement Works
Fibonacci retracement is a measure of the extent of a past movement (down or up) that has been reversed before the price proceeds in the original direction. You begin with two significant points on the chart- normally a swing high and a swing low.
The Fibonacci tool then graphically calculates critical percentage levels (23.6, 38.2, 50, 61.8, and 76.4) in between the two points. These levels are considered as possible areas of support or resistance, on which traders anticipate prices to stagnate or rebound.
Best Fibonacci trading strategies
Any form of pullback can be considered a retracement, and the particular Fibonacci levels need not be observed to allow a trader to view the action as a retracement. The respect of those levels will often inform us on the mindset of the market and the next step.
Shallow Retracement Strategy (23.6%–38.2%)
Shallow retracement is most common in powerful, fast-moving markets when the trend is obviously upwards, and any regression is short-lived. These reversals are likely to happen at the 23.6 percent or 38.2 percent Fibonacci points.
Consider an example of a sharp increase in Bitcoin. The price soars rapidly, halts briefly at the 23.6 percent mark, and then continues its rise. The shallow retracement can be used by traders interested in catching that next leg up to enter the market with tight stop losses- normally set just below the previous swing low.
Deep Retracement Strategy (61.8%-76.4%)
Now, the reverse is deep retracements. These happen when the market takes a larger breather–retracing more than half of whatever it has already taken, and then resumes the original direction. Serious retractions usually indicate indecisiveness or confusion among traders.
These combinations will usually occur following a protracted rally or a swift drop as a significant number of participants begin to take profits or fade the move. As an example, during a downward trend, a short-selling opportunity can be great at the 61.8% or 76.4% mark. In this case, you would get into a trade close to the Fibonacci level and set your stop slightly above the last swing high.
Mid-Sized Retraction Strategy (Approximately 50)
Not all retracements are extreme–some are in the middle ground. One of the most widespread retracement areas is a 50 percent pullback, although this is not actually a Fibonacci number. Markets tend to experiment with this halfway point and then determine the way to move forward.
Mid-sized retracements are ideal for traders who would like to have a combination of early entries and confirmation. Rather than using Fibonacci levels only, it is useful to seek chart patterns that develop around the 50% level, such as wedges, flags, or triangles.
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