Fibonacci Retracements: A Simple Guide

Here at Trade with Precision we teach you how to analyse and trade the markets in a simple and straightforward way. How we use the Fibonacci retracement tool in our trading is no different.

Simply put, Fibonacci is a sequence of numbers that was developed by Leonardo Fibonacci back in 1202. The sequence of numbers can be found throughout the universe including in mathematics, nature (explaining tree branches and the spiral in shells) and even trading! Based on the sequence of these numbers we can find consistent ratios including 0.618 and 0.382.

Here at Trade with Precision we also use the 0.50 ratio which doesn’t come from the Fibonacci sequence however it seems to be an important level for traders alike as it gives us the perfect equilibrium point.

So let’s go through an example of how we would use the Fibonacci retracement tool if we were trading within an uptrend. Firstly we MUST draw the Fibonacci tool from the most recent low formed in price to the most recent high formed in price. The example below shows how to correctly draw the Fibonacci retracement tool on your charts. We start from the most recent low and drag it up to the potential most recent high in price (if price continues to move higher once we have drawn the retracement tool then simply re-draw it). 

We look to find entries into the prevailing trend when we have a pullback anywhere between the 50% and the 61.8% retracement levels. These levels, along with a number of other factors provide us with precise entry points where we predict that price will continue higher from. We have built a high probability trading strategy around this theme which is taught on one of our courses.

Below is the end result from the price action that followed. As you can see, price slightly made a new high compared to how the Fibonacci retracement was drawn originally so we simply redrew it to the new high. Price then proceeded to pull back precisely between the 50% and 61.8% and move higher from there. 

When you start combining Fibonacci retracements with other factors such as support and resistance they can become a very powerful tool to use when trading the markets. You will find the Fibonacci retracement tool on most charting platforms so we encourage you to start drawing these Fibonacci retracements on trending markets and take notice of what levels price pulls back to.

If you have any questions about using Fibonacci retracements that you would like answering then feel free to get in contact with us using the following email address: info@tradewithprecision.com

Happy Trading!

The TWP Team