Fibonacci

What Fibonacci levels are

Fibonacci levels are fixed ratios derived from the Fibonacci sequence, used to identify reversal and extension zones on a chart. They are simple to read and, alongside other confluences, help pin down entries and exits. Why do they work at all? The market runs on emotion, and people act in patterns whether they notice or not; those patterns show up on the chart, and the ratios describe them.

Drawing a retracement

Divide a number in the sequence by the one that follows and you get ratios such as 1.618, 0.618, 0.382 and 0.236. They turn up in nature, architecture and mathematics as well as on charts. To draw the levels, take a consistent move and run the tool from its lowest point to its highest point. The retracement lines sit at 61.8, 38.2 and 23.6 percent of that move: in an uptrend they measure down from the high, in a downtrend up from the low.

Where price reacts

Once the levels are on the chart, they show where price may react and where a shift in momentum may start. The most common reversal points are the 38.2, 50 and 61.8 percent levels. The confluence worth waiting for is a level that lines up with an order block. Retail stops tend to sit 10 to 15 pips beyond the obvious entry, which is why the deeper 71 to 78.6 percent area matters most: it marks an extreme pullback, and when it lines up with an order block it is double confirmation. The idea is always to buy or sell at a discount, the way you would in the housing market.

How deep is deep enough

Wait for the market to retrace at least 50 percent, into the discount area, before considering a buy or a sell in either direction. The one exception is the 38.2 level, and only when it lines up with an indecision candle and order flow has already been established.

Taking profit with extensions

The extension tool takes three clicks: a significant swing low, the most recent swing high, then back down to one of the retracement levels. It then draws the extension levels, each with its ratio and price. In the GBP/USD example, price rallied to the 0.5 extension, which lined up with the previous swing high, wicked back to the 0.382 and found support there, rallied to resistance at the 1.0 level, and days later met resistance again at the 0.618. The 0.5, 0.618 and 1.0 extensions would all have been good places to take some profit, and the 1.27 and 1.62 extensions are strong take-profit zones in general.

In a downtrend the idea is the same: take profit on a short at an extension level, because the market often finds support there. On this GBP/USD daily chart an institutional order block was filled on the daily, an imbalance was filled on the 4-hour just under the 61.8 percent level, and price reversed all the way back to the swing low.

Price finds at least temporary support or resistance at the extension levels often enough to adjust a position and take profit there, but not always. There is no way to know in advance which extension level will hold, so never rely on the levels alone.

Measure the correction you took

Click your entry candle on the Trade Desk and the move that led into it is on the chart, so you can measure how deep the correction had come when you entered, and whether it had reached the discount or was still in the top half of the move.