Ever wondered how traders seem to know when the price might bounce or reverse? One of their tools could be the Fibonacci retracement. In this guide, we’ll explain what it is, how to use it, and how you can apply it in your own trades—even if you’re new to trading.
At Vestrado, we want everyone to understand trading, no matter your background. That’s why we explain everything in a simple and easy-to-read style.
What is a Fibonacci Retracement?
Fibonacci retracement is a tool in technical analysis that shows possible levels where the price might slow down, reverse, or bounce during a trend. These levels are based on a set of numbers called the Fibonacci sequence.
On a chart, Fibonacci retracement appears as horizontal lines that help traders identify support and resistance levels.
Why Many Traders Use Fibonacci Retracements
Fibonacci retracement is popular because it’s simple to apply and works well in trending markets. Many traders use it, which also makes it more powerful.
The levels often act like self-fulfilling price zones. When enough people believe the price will react at a certain level, it often does—at least temporarily.
When Should You Use the Fibonacci Tool?
Best Used in Trending Markets
The Fibonacci retracement tool works best when the market is trending—either moving up or down.
- In an uptrend, traders look to buy when the price pulls back to a Fibonacci support level.
- In a downtrend, traders look to sell when the price pulls back to a Fibonacci resistance level.
If the market is going sideways, this tool may not be very helpful.
How to Draw Fibonacci Retracement Levels
Using Fibonacci retracement is simple if you follow these steps:
Step 1: Identify the Trend
Start by identifying the direction of the market. Is it trending up or down?
Step 2: Find Swing Highs and Lows
- For an uptrend, find the recent Swing Low and Swing High.
- For a downtrend, find the recent Swing High and Swing Low.
Step 3: Apply the Tool
- In an uptrend: click on the Swing Low and drag to the Swing High.
- In a downtrend: click on the Swing High and drag to the Swing Low.
Once you do this, your trading platform will draw horizontal lines at key Fibonacci levels, including 23.6%, 38.2%, 50%, 61.8%, and 78.6%.
What Do the Fibonacci Levels Mean?
Each Fibonacci level is a percentage that shows how much the price may retrace before continuing in the direction of the trend.
23.6% Level
This level shows a very shallow retracement. It’s common in strong trends.
38.2% Level
This is a common pullback area. Many short-term traders look at this level.
50% Level
This is not an official Fibonacci level, but many traders use it. It’s seen as a good place for price to bounce.
61.8% Level
This is the most important Fibonacci level, also called the “golden ratio.” Many bounces happen here.
78.6% Level
This is a deeper retracement. If the price bounces here, the trend may still continue, but this area is more risky.
Example: Using Fibonacci Retracement in a Real Trade
Let’s say the EUR/USD currency pair is in an uptrend. It moves from a low of 1.0800 to a high of 1.1000.
Now, it starts pulling back. You use the Fibonacci tool:
- Swing Low: 1.0800
- Swing High: 1.1000
The Fibonacci tool shows:
- 1.0950 at 23.6%
- 1.0924 at 38.2%
- 1.0900 at 50%
- 1.0876 at 61.8%
You wait for price to touch 1.0900 (50%) and see a bullish candle. That may be your signal to enter a buy trade. You set your stop loss slightly below the 61.8% level, and your take profit near the previous high or a bit higher.
Are Fibonacci Levels Always Accurate?
No, Fibonacci levels are not always reliable. Price doesn’t always bounce exactly from these levels. They are only potential areas of interest.
Think of them as zones, not exact points. Always confirm with other tools before making a decision.
Combine Fibonacci with Other Tools
To improve your trading success, combine Fibonacci retracement with:
- Support and resistance zones
- Candlestick patterns
- Moving averages
- Trend lines
- Volume indicators
Confirmation is important. Don’t rely only on Fibonacci levels.
Why Fibonacci Works in Trading?
Fibonacci retracement often works because many traders are using it. When many people are watching the same levels, those levels become more important.
This creates a self-fulfilling effect: traders expect price to bounce, so they place trades at those levels, which increases the chance of a bounce.
Get Started with Vestrado’s Demo Account
Want to see how Fibonacci retracement works in real-time? Don’t just read about it—test it yourself on Vestrado.
Open a free demo account and start using the Fibonacci tool on real charts. There’s no risk, no commitment, and no need to deposit. It’s the best way to build confidence and skill before trading with real money.
Fibonacci retracement is a valuable tool for finding key price levels where the market might react. It helps traders spot areas to enter or exit trades based on natural pullbacks in a trend.
But remember—Fibonacci is not a magic formula. It works best when combined with other analysis tools and good risk management.
Whether you’re new or already trading, Vestrado gives you the tools, support, and platform to apply Fibonacci retracements with ease.
Take the next step. Open your free demo account today and start practicing with confidence—only on Vestrado.
