Fibonacci Retracements | RizeTrade

What is Fibonacci Retracement?

Fibonacci Retracement is a popular technical analysis tool used to identify potential support and resistance levels based on the Fibonacci sequence. Traders use these levels to predict possible price pullbacks, reversals, or continuation points during trending markets.

The tool plots horizontal lines at key Fibonacci ratios — typically 23.6%, 38.2%, 50%, 61.8%, and 78.6% — between a significant high and low on a price chart. These levels represent potential areas where price may “retrace” before resuming its original trend.

🔑 Key Takeaways

 📐 Fibonacci Retracement highlights potential price correction zones within an ongoing trend.
 📊 Key retracement levels include 23.6%, 38.2%, 50%, 61.8%, and 78.6%.
 🎯 Assists traders in spotting pullback entry points or profit-taking zones.
 🧩 Delivers stronger signals when combined with trendlines, moving averages, or candlestick patterns.
 🌍 Applicable across all markets and timeframes — stocks, forex, crypto, and commodities.

🔍 How Reliable Are Fibonacci Retracement Levels?

Many traders rely on Fibonacci retracements to pinpoint potential pullback zones — but how consistent are these levels in real trading conditions?

🧪 Our Testing Process

Statement:
We ran a full internal backtest using our Indicator Performance Matrix to measure Fibonacci retracement reliability across assets and timeframes.

Evidence:

• 2,680 total setups tested across forex, stocks, and crypto

• Timeframes: 15m, 1H, 4H, and Daily

• Included both trend continuation and countertrend reversal setups

• All tests executed under identical data conditions within MetaTrader

Insight:
This setup allowed us to isolate Fibonacci behavior across different market speeds — from short intraday swings to broader trend movements.

📈 Key Findings

Statement:
We measured how effectively Fibonacci retracement levels signaled actionable reactions within trend-aligned setups.

Evidence:

Insight:
👉 The 61.8% Fibonacci level consistently showed the strongest reaction zone, especially during moderate pullbacks in trending markets.
Average success improved by 3–4 percentage points when signals aligned with trend confirmation tools like a 50-period moving average.
Traders can improve their precision by analyzing their trading history to see how often Fibonacci-based entries align with profitable outcomes.

📐 Fibonacci Retracement Calculation

Fibonacci Retracement Levels are based on key ratios derived from the Fibonacci sequence — a mathematical series where each number equals the sum of the previous two (1, 1, 2, 3, 5, 8, 13, …).

In trading, these ratios are used to identify potential support and resistance zones during price pullbacks or retracements.

🧮 Key Fibonacci Ratios

📊 Example Calculation

If a stock moves from $100 (Low) to $200 (High):

💡 Interpretation

• 📈 Retracement levels act as potential support zones when price falls during an uptrend.

• 📉 They act as resistance zones during a downtrend retracement.

• ⚖️ Traders watch for price reactions at these levels to confirm reversals or continuation.

Example Insight:
If price rises from $100 → $200 and retraces to $150 (50%), the market is showing a healthy correction before potentially resuming the uptrend.

🧭 Quick Takeaways

• 61.8% → Most significant Fibonacci level (Golden Ratio).

• 50% → Key psychological level.

• Confluence with moving averages or trendlines strengthens these zones.

Fibonacci retracements help traders anticipate reaction zones — where momentum may pause, reverse, or resume.

Best Fibonacci Retracement Settings

💡 Pro Tip: Combine Fibonacci retracements with trendlines or moving averages (e.g., 50 EMA) for higher probability confluence zones.

📐 How to Trade with Fibonacci Retracement?

The Fibonacci retracement tool helps traders pinpoint potential pullback zones within a trend, identifying where price may reverse and resume its dominant direction.

🔍 Entry

Start by identifying a strong trending move with a clear swing high and swing low.

• In an uptrend, draw from low to high; in a downtrend, draw from high to low.
  Wait for price to retrace to a Fibonacci level (such as 38.2%, 50%, or 61.8%) that aligns with other confirmation tools like RSI or candlestick reversals.
  Enter once the price rejects the level and resumes in the trend’s direction.

🛡️ Stop-Loss

Position stops just beyond the next Fibonacci level to protect against deeper retracements.
For example, if entering long at 50% retracement, place the stop near 61.8%; if shorting at 38.2%, set it just above 50%.
This keeps the trade structured around Fibonacci-based invalidation points.

🎯 Target

Take partial profits at the previous swing high or low, depending on trade direction.
For extended targets, use Fibonacci extension levels such as 127.2% or 161.8%, which often align with the end of impulsive price waves.

Trading Strategies that Use Fibonacci Retracement

Fibonacci + Moving Average Confluence Strategy

Concept
This setup targets high-probability reversal zones where Fibonacci retracement levels align with a moving average, combining structural and dynamic support or resistance.

Setup
Identify a clear trend and draw Fibonacci retracement from swing low to swing high (uptrend) or swing high to swing low (downtrend).
Add a 50-period EMA to the chart to gauge dynamic trend strength.

Long Setup / Short Setup
Enter when price retraces to the 50% or 61.8% level and touches the EMA.
Confirm with bullish or bearish reversal candles before entering.
Place the stop-loss below the next Fibonacci level and target the previous swing high or 161.8% extension for exits.

Example
On the EUR/USD 4H chart, price retraced to the 61.8% level at 1.0800, aligning with the 50 EMA.
A bullish engulfing candle confirmed the reversal, triggering a 180-pip rally to 1.0980.

What Gives It an Edge
The combination of Fibonacci structure and EMA confluence filters weak retracements and identifies points of strong trend continuation.

Real Trading Example: Fibonacci Retracement on TSLA

On the TSLA Daily Chart, price surged from $180 to $260, then retraced to the 61.8% Fibonacci level at $210, aligning with a major support zone.
A bullish hammer candle confirmed the reversal.

Trade Setup:

• Entry: $212

• Stop Loss: $205 (below the 78.6% level)

• Take Profit: $245 (previous high)

The trade produced a 3.2:1 reward-to-risk ratio, showcasing the power of Fibonacci confluence in trend pullbacks.

Best Indicators to Combine with Fibonacci Retracement

Common Mistakes and How to Avoid Them

Drawing Fibonacci Levels Incorrectly
Always draw from swing low to swing high in uptrends and swing high to swing low in downtrends. Reversing direction distorts accuracy.

Ignoring Confluence
Don’t rely solely on Fibonacci ratios. Combine them with trendlines, moving averages, or candlestick confirmations for higher reliability.

Overtrading Minor Pullbacks
Not every retracement leads to a reversal. Focus on major swings with strong market structure and volume confirmation.

📐 Fibonacci Retracement vs. Fibonacci Extension

Traders often use Fibonacci tools to map price movement — one to spot potential pullbacks, the other to forecast extensions beyond previous highs or lows.

🔍 Core Difference

Statement:
While both tools stem from the same Fibonacci ratios, Retracements and Extensions serve opposite purposes in trade planning.

Evidence:

Insight:
Fibonacci Retracement highlights where a correction may pause or reverse, while Fibonacci Extension projects how far the next impulse move could travel.
Used together, they provide a complete price roadmap — retracements guide entry timing, and extensions define realistic exit or target zones.

For practical application, traders can review their trade performance to evaluate how retracement and extension confluence impacts trade precision across different market structures.