Master Fibonacci Retracements: The Practical Guide to Predict Movements in the Markets

The Mathematical Origin of Fibonacci in Financial Markets

Behind one of the most effective tools in technical analysis lies a fascinating history. Leonardo Pisano, an Italian mathematician of the 12th century, published in his work “Liber Abaci” a numerical sequence that would change market analysis: the Fibonacci sequence (0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144…).

The magic resides in the golden ratio: 1.618. Each number is approximately 61.8% of the next and 23.6% of the second following. In turn, each number is 38.2% larger than the previous one. This mathematical pattern not only appears in nature — in shell structures, tree branches, and proportions of the human body — but also reproduces itself in financial market charts.

Traders discovered that markets respond to this ratio, generating predictable bounce points. From these calculations, the levels we use in trading emerge: 23.6%, 38.2%, 50%, 61.8%, and 76.4%.

What Are Fibonacci Retracements Really

A Fibonacci retracement is a tool that measures how far an asset’s price retraces after a significant move. Markets never move in a straight line; after an advance, a correction always follows.

This is where this technique comes in: we draw a line from the last low to the last high (or vice versa in downtrends), and automatically obtain support and resistance levels. These levels indicate where the price could bounce and continue its original trend.

The beauty of Fibonacci retracements lies in their universality. They work in all markets: currencies, stocks, indices, commodities, and cryptocurrencies. It is equally effective to use them on 5-minute charts as on weekly charts, although higher timeframes offer greater reliability.

How to Correctly Draw Fibonacci Retracements

The drawing follows a fundamental rule: always from left to right, identifying the most recent high and low of the current trend. It doesn’t matter if the trend is bullish or bearish; the procedure is the same.

Some traders debate whether to include the “wick” of the candle or just the body. Both approaches work; consistency is what matters. As you gain experience, you will discover which method best suits your trading style.

Once the Fibonacci is drawn, the levels will show you where the price could stabilize. These points become ideal zones to place entry orders, define stop loss, and set take profit.

Practical Application: Fibonacci Retracements in Real Trades

Case 1: Long-term Position Trade

Let’s observe the EUR/USD currency pair on a daily timeframe during a clear downtrend. The high was at 1.09414 in May, and the new low reached 1.03489. When the market begins to rise, we draw the Fibonacci from left to right.

The decisive confluence occurs when a 50-period moving average (EMA 50) converges with the 61.8% retracement level, just before June begins. This is the signal we seek.

Entry: 1.07139 (61.8% level)
Stop Loss: 1.09414 (previous high, risk of 228 pips)
Take Profit: 1.01810 (calculated using Fibonacci extensions, aiming for 532 pips)

The trade opens on May 23. The price reaches a high of 1.07783 within the trade (generating an unrealized loss of 65 pips), but then resumes the expected direction. On July 5, after 43 days, the order closes at TP with profits.

With a lot size of 0.01, the trader risked 22.8 USD to gain 53.2 USD (minus commissions). Risk-reward ratio: 1:2.33.

Case 2: Intraday Trade with Multiple Confluences

On June 17, the same EUR/USD shows a different picture. On the daily timeframe, a Fibonacci indicates the overall downtrend, but on the 1-hour timeframe, a local bullish opportunity arises.

The 1-hour Fibonacci marks a clear entry at the 61.8% level. However, the daily Fibonacci (higher timeframe, higher reliability) provides confluence to define the take profit: it should not exceed the 61.8% daily level or can be placed at the 0% of the hourly Fibonacci.

Entry: 1.04651 (61.8% of the 1-hour Fibonacci)
Stop Loss: 1.04250 (40 pips risk, just below the 78.6% hourly level)
Take Profit: 1.06011 (0% of the 1-hour Fibonacci / 61.8% of the daily Fibonacci)

The lowest price during the trade touches 1.04441 (loss of 21 pips), but quickly recovers. On June 22, after 3 days of trading, it closes at TP.

With a lot size of 0.05, the risk was 20 USD and the profit reached 62.5 USD (before commissions). Risk-reward ratio: 1:3.13.

The key in this case was using two Fibonacci retracements as confluences, trading against the daily trend but in favor of the hourly trend, with a cautious stop loss.

Why It Works: Supports, Resistances, and Bounces

Fibonacci retracements work because they synthesize the fundamental concept of technical analysis: support and resistance levels.

Support is a price where demand is strong enough to halt declines. Resistance is a price where supply is solid enough to stop advances. Market movement generates “bounces” at these levels, and Fibonacci helps us identify them mathematically.

When drawing retracements, each level (23.6%, 38.2%, 50%, 61.8%, 76.4%) represents an area where the price could find support or face pressure. Experienced traders notice that certain levels work more consistently in specific assets or timeframes.

Fibonacci Extensions: Projecting Targets

Beyond retracements, Fibonacci extensions exist. While retracements measure how far the price retraces from a previous move, extensions project how far it could advance afterward.

Extensions are mainly used to define take profit, especially in longer-term trades. If you know how far the price retraced, you can calculate where it might reach new highs or lows.

Is It Really Reliable to Use Fibonacci Retracements Alone?

The answer is no. Fibonacci by itself does not guarantee 100% results, just like any individual indicator. Its strength lies in confluences.

A confluence occurs when multiple signals converge: a Fibonacci retracement coincides with a moving average, or a Fibonacci level aligns with a historical resistance level, or a chart pattern confirms the level. The more signals converge, the greater your confidence in the trade.

That’s why professional traders combine Fibonacci with:

• Moving averages (EMA 50, EMA 200)
• Historical support and resistance levels
• Candlestick patterns (doji, hammers, engulfing)
• Fundamental analysis (news, economic data)
• Volume (confirmation of movements)
• Other technical indicators (RSI, MACD, Bollinger Bands)

Timeframes: The Larger, The More Reliable

An immutable principle in Fibonacci: the higher the timeframe, the greater the reliability. A Fibonacci on a daily chart is more effective than one on a 15-minute chart.

This explains why, in the second case mentioned, the daily Fibonacci determined the profit target for the 1-hour trade. Higher timeframes act as a “compass” for short-term trades.

Many traders use multiple timeframes simultaneously: a higher timeframe provides the overall direction (macro confluence), and lower timeframes offer precise entry points (micro confluence).

Customizing Your Approach with Fibonacci

As you gain experience, you will discover that some levels work better than others depending on the asset and period. Some traders add additional levels (like 78.6%, 88.6%) or modify standard percentages.

There is no “correct” approach. Consistency and backtesting are your best tools to refine your methodology. Test, record results, adjust.

A demo account is the ideal place to familiarize yourself with Fibonacci without risk. Practice identifying highs and lows, experiment with different timeframes, try multiple confluences. The accumulated experience will teach you when to trust Fibonacci retracements and when to seek additional confirmations.

Fibonacci retracements are not a complete trading system, but they are an exceptional tool when used correctly within a comprehensive approach that includes risk management, confluences, and operational discipline.