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As we mentioned before, the most popular combination is Fibonacci extension and Fibonacci retracement. Here, we will discussion how to use those Fibonacci tools properly for your trading.

How to Use Fibonacci Retracement Levels

Fibonacci retracement levels help to provide price levels of support and resistance where a reversal in direction could take place and can be used to establish entry levels. The retracement levels are based on the prior move in the market.

After a big rise in price, traders will measure the move from bottom to top to find where price could retrace to before bouncing higher and continuing in the overall trend higher. After a big fall in price, traders will measure the move from top to bottom to find where price could retrace to before correcting lower and continuing in the overall trend lower, and the pattern visually which is shown below.

First, traders usually use the Fibonacci sequence to identify some important Fibonacci ratios such as the 0.618 (which forms the 61.8% Fibonacci retracement level) and the 0.382 number (which forms the basis of the 38.2% Fibonacci retracement level). There are also other Fibonacci trading ratios that traders use such as 23.6% and 78.6%, among others. The four listed in the diagrams above are the most commonly used Fibonacci retracement levels.

The buy pattern is used when the market is an uptrend. Traders will attempt to find how far price retraces the X to A move (swing low to swing high) before finding support and bouncing back higher (B). These support levels are the Fibonacci retracement levels and could be a 23.6%, 38.2%, 61.8% or 78.6% retracement of the X to A move.

The sell pattern is used when the market is in a downtrend. Traders will attempt to find how far