Fibonacci Retracement, sometimes known as the Golden Ratio, has long been related to the financial industry. It is a popular indicator in all trading markets, especially the Forex market. Fibonacci can effectively identify price reversal points by applying the golden number theory to the graph.

Today, Fxtoday will explain the Fibonacci Retracement, how to use it, and how to apply it to the Forex market.

What Is Fibonacci Retracement?

Leonardo Fibonacci, an Italian mathematician, invented Fibonacci Retracement as a mathematical tool. He used Fibonacci to identify market reversals by employing the golden ratio and price movements.

How to Correctly Use Fibonacci Retracement 

To correctly use Fibonacci retracements, you should keep an eye on the price trend. If the price is rising, you should drag the line from top to bottom and focus on support. However, if the price is falling, you should drag the line from the bottom up and focus on the resistance. Significantly, it must be drawn from one high or low to another. Moreover, Fibonacci Retracement can also be drawn from the past to the present or only in the present. 

Nevertheless, traders usually drag in the current price. In addition, you should remember that the longer the Fibonacci is dragged, the longer it takes for the price to reach a meaningful level. Hence, Fibonacci draws can be short or long, depending on the trader's trading strategy.

The XAU/USD TF 1h chart sample shows that the chart is in an uptrend. Drawing Fibonacci Retracement from the current high to the recent low is a short draw appropriate for a day trader. If you believe that the graph is about to fall, it may also be depicted as a downtrend.

Fibonacci Retracement Trading

Each preceding point is crucial since each Fibonacci level is linked with support-resistance. Therefore, trading with Fibonacci Retracement is a trade that focuses on support-resistance points by numerical level of Fibonacci.

Using Fibonacci to trade by drawing support and resistance lines based on the level may determine which level has the most significant reversal. If the price frequently bounces or rests at that level, it suggests that the level is the greatest support-resistance and most probable reversal point.

Example of Using Fibonacci Retracement in Trading

From the XAU/USD TF 1h chart, price has taken a pause in that area after the price has declined. As shown in the example, you should drag the Fibonacci Retracement from the current high to the point where the price retraces. In addition, to confirm reversals and breakouts, you should retrace support at Fibonacci level 0. 

The price rebounded from the support this time. At the support level, a bullish engulfing candle developed, which is an excellent confirmation of a reversal. In this case, however, it is still not advised to buy quickly, since the price may fall more. Therefore, a signal must exist to confirm the reversal, which entails waiting for the price to Re-Test the support zone. There is a possibility that the Fibonacci at level 0 will become a genuine reversal point if the price is unable to break below it.

According to the chart, the price has fallen, retested the support, and was rejected in that zone. This means that the price will soon begin an uptrend. At this point, it can be used as an entrance point for transactions. Significantly, after the price has undergone Re-Test and rejection, the price continues to grow.

Using Fibonacci with Other Indicators

Fibonacci Retracement can be used in combination with other indications and in a variety of situations. Significantly, it is a tool only used to identify reversals. Consequently, we will need additional tools or indications to prove this reversal point. For example, using the Volume tool to see the strength of Fibonacci at various levels.

From the XAU/USD TF 1h chart, it can be noted that the price has reversed in the range of the 0.236 Fibonacci level. The price turnaround at the Fibonacci level of 0.236 was supported by a large amount of buying volume in that zone.

Warnings 

The following warnings relate to Fibonacci Retracement:

- Price will not revert at all Fibonacci levels as charts contain major points where huge investors often trade. We will concentrate on some levels that are exactly as significant as support-resistance levels.

- A failed breakout, the price that has broken through the Fibonacci levels but retreated, may occur. This might result from faulty Fibonacci drags or important Fibonacci levels that block the price from rising. Therefore, we must examine the significance of each level in greater detail.

Conclusion

The Fibonacci Retracement is an effective reversal tool. It is applicable to all market circumstances, indicators, and other strategies. Importantly, it has few limitations. Nonetheless, due to the substantial danger connected with Forex trading, traders should study the tactics before investing.

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