Drawing Fibonacci Retracement Areas on Upward and Downward Trend

The price of a currency pair does not move up or down in a straight line. Instead it moves up or down in a zigzag pattern. Fibonacci Retracement is the tool used to calculate where the zigzag will stop. The pullback levels are 38.2%, 50% and 61.8%. These form the points at which the market is likely to make a retracement.

What is retracement? It is a pullback of the price before the market resumes the original trend/original direction of movement.

Example of Zigzag Movement: The Examples below shows price heading upwards in a zigzag pattern.

The diagram below shows movement in an upwards market.

1-2: Price moves up

2-3: Pullback

3-4: Moves up

4-5: Pullback

5-6: Moves up

Since we can spot where a pull-back starts on a Forex chart, how do we know where it will reach?

The answer is we use Fib retracement tool.

This is a type of line study used in forex trading to predict and calculate these levels. This indicator is placed directly on the currency chart within the platform provided by your broker, This indicator will then automatically calculate these levels on the chart.

What are The Retracement Levels

• 23.6 %
• 38.2 %
• 50.0 %
• 61.8 %

38.2% & 50.0% Levels are the most used & most of the time this is where the pull back will reach. With 38.2% being the most popular and most widely used.

61.80% is also commonly used to set stops for trades opened using this strategy.

This tool will be drawn in direction of the trend as explained in the example below.

How to Draw on an Upward Bullish Market

In the diagram below the price is moving up between 1 and 2 then after 2 it retraces down to 50.0% pull back area then it continues moving up in the original upward trend. Notice that this indicator is drawn from point 1 to point 2 in direction of the Forex trend (Upward).

Because we know this is just a pullback based on our using this indicator, we put a buy order just between the levels 38.2% and 50.0% and our stop loss just below 61.8% pull back mark. If you had put a buy at this point in the trade example below you would have made a lot of pips.

Explanation for the Above FX Trading Example

Once the trade hit the 50.0 % level, this zone provided a lot of support for the price, & afterward market then resumed the original up trend & continued to move upward.

23.60% provides minimum support & isn't an ideal place to place an order.

38.2 % provides some support but price in this example continued to retrace up to the 50% zone.

50.00% provides a lot of support and in this example, this was the ideal place to set a buy order.

For this example, the pull back reached the 50.00% pull back area, but most of the time the market will retrace up to 38.2 % and therefore most of the time traders set their buy limit orders at the 38.2 % level, while at the same time placing a stop just below 61.8 %.

How to Draw on a Downward Bearish Market

In the diagram below the market is moving down between 1 and 2, then after 2 it retraces up to 38.2% retracement then it continues moving down in the original downward trend. Notice that this indicator is drawn from point 1 to point 2 in direction of the Forex trend (Downward).

Because we know this is just a pull back we put a sell order at 38.2% level and a stop loss just above 61.80%.

If you had put sell order at the 38.20% level as shown on the trade below you would have made a lot of pips afterwards. In this trade the retracement reached 38.2% point & did not get to 50.0% mark. From experience it's always good to use 38.20% because most times the pullback does not always get to 50.00% mark.

Explanation for the Above Forex Trading Example

The above examples is the perfect setup where the price retraces immediately after touching the 38.2% Level.

This zone provided a lot of resistance for the pull back, this was the best place for an investor to place a sell limit order as the market quickly moved down after hitting this level.