The market never moves in a straight line. It moves in waves: Impulse (Trend) and Correction (Pullback).
The biggest question every trader asks is: "Where will the pullback stop?"
The answer lies in the mathematics of nature. The Fibonacci Retracement tool allows you to predict, with uncanny accuracy, where the buyers are waiting to reload their positions.
1. What is the Fibonacci Sequence?
Without getting too mathematical, Fibonacci is a sequence of numbers found everywhere in nature (galaxies, seashells, DNA).
In trading, the ratio 61.8% (0.618) is key. It is the "Golden Ratio".
Human psychology works in patterns. When price drops, traders instinctively look for "value" at the 50-60% discount level.
2. How to Draw It Correctly (The #1 Mistake)
Most beginners draw it randomly. You must follow the Swing Highs and Lows.
For an Uptrend (Buying):
- Click/Drag from the Swing LOW (Start of the move).
- Release at the Swing HIGH (End of the move).
For a Downtrend (Selling):
- Click/Drag from the Swing HIGH.
- Release at the Swing LOW.
Rule: Always draw from Left to Right. Never go backwards in time.
3. The "Golden Zone" (0.618 - 0.786)
While there are many levels (0.236, 0.382), professional traders focus on the "Deep Retracement" levels.
- 0.50 (Equilibrium): The midpoint. Fair price.
- 0.618 (Golden Ratio): The sweet spot. Where algorithms trigger.
- 0.786 (Deep Discount): The last stand before structure breaks.
Strategy: We only look for Buy entries between the 0.618 and 0.786 levels. This gives us the best Risk-to-Reward ratio.
4. Premium vs. Discount (SMC Connection)
If you study Smart Money Concepts (SMC), Fibonacci is used to determine Value.
Imagine an iPhone costs $1,000.
- Price > $500 (Premium): It is expensive. Banks want to SELL here.
- Price < $500 (Discount): It is cheap. Banks want to BUY here.
Rule: Never buy in the Premium zone. Never sell in the Discount zone.
5. The Convergence Strategy (Confluence)
Fibonacci alone is not enough. You need "Confluence" (multiple reasons to enter).
The Perfect Setup:
- Price hits the 0.618 Fibonacci Level.
- There is a Fair Value Gap (FVG) at the same level.
- There is a previous Support/Resistance level there.
When these three align, the probability of a bounce is over 80%.
6. Stop Loss and Take Profit
Using Fibonacci makes placing your Stop Loss easy.
- Stop Loss: Place it just below the 1.0 (Start of the move) or below the 0.786 level.
- Take Profit 1: The 0.0 Level (Recent High).
- Take Profit 2: The -0.27 Extension (The "Home Run" target).
Final Thoughts
The Fibonacci tool is your map in the chaos of the market. It tells you exactly when a price is "Cheap" or "Expensive".
Add this to your chart today, measure the last impulse move, and watch how price reacts to the 0.618 line like magic.
See how this fits into the bigger picture: Multi-Timeframe Analysis Guide