How to use a Fibonnaci retracement tool
Fibonacci. Also known as Leonardo Fibonacci. We are not going to bore you with the details about one of the most talented mathematicians of the Middle Ages, but we can confidently say that his works have greatly empowered the world of technical analysis.
There are hundreds, if not thousands, of technical analysts who use Fibonacci tools as part of their day-to-day routine. They scour the markets to look for prime entry and exit levels.
There are fib circles, fib times zones, fib speed fans. In this piece we are going to look at how to use a Fibonacci retracement tool.
Figure 1 Leonardo Fibonacci
Why use a Fibonacci retracement tool?
Markets tend to move in waves. These waves or trends will either be with, or against, the main long-term cycle.
Like the waves of the sea, they can be strong and aggressive, but they will not last forever. They lose momentum and ‘peter out’ when buyers or sellers are exhausted.
We then see corrective moves in the other direction as profit is taken and new positions are set in place. Often these ‘corrective’ moves will pull back to a Fibonacci retracement level.
Let us look at the uses of Fibonacci retracement levels
Fibonacci is used in a variety of technical analysis theories and concepts. We are going to concentrate on the very popular Elliott Wave theory and the not so well used, Cypher of Symmetrical patterns.
The most popular settings for the Fibonacci retracement tools are:
- 38.2% - common for a 4th wave correction in Elliott Wave and the BC leg in cypher patterns
- 50% - corrective wave 2, inside the impulsive 5-wave sequence, Elliott Wave
- 61.8% - the most common Fibonacci pullback level. This is known as the Golden Ratio. Also seen in the corrective wave 2, inside the impulsive 5-wave sequence, Elliott Wave
- 78.6% - commonly used in the Gartley 222 cypher pattern but can be seen in wave 2 inside the impulsive 5-wave sequence, Elliott Wave
The less common levels are:
- 23.6% - common for a 4th wave correction in Elliott Wave
- 88.6% - common in the BC leg in cypher patterns
Example of Elliott Wave retracement(s):
Figure 2 Common Elliott Wave retracement levels
Example of the Cypher pattern BC leg(s):
Figure 3 BC legs Cypher Pattern retracement levels
How to set up your Fibonacci Retracement tool
It is a simple process on most charting platforms. Open the tool and click on the retracement levels that you want to use.
Figure 4 Trading View Retracement levels
If you would like to learn more about technical analysis, please click here.
The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research we will not seek to take any advantage before providing it to our clients.
Pepperstone doesn’t represent that the material provided here is accurate, current or complete, and therefore shouldn’t be relied upon as such. The information, whether from a third party or not, isn’t to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product or instrument; or to participate in any particular trading strategy. It does not take into account readers’ financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of Pepperstone, reproduction or redistribution of this information isn’t permitted.