Fibonacci retracement

A price that rose or fell a long way often gives back part of that move while it rests. Fibonacci retracement joins the low and high of one stretch and draws horizontal lines at 23.6%, 38.2%, 50%, 61.8% and 78.6% of its height, setting in advance the levels to watch for where the retracement stops. In this lesson we look at how to choose the high and low, where to get in and where to stop the loss between 38.2% and 61.8%, and levels that overlap support, resistance or a moving average, along with wrong examples where the 78.6% level broke. The ratios are price levels, not the odds of being right.

Giving back part of the rise

Price does not move straight in one direction. After a big rise, the people who bought earlier take profits and the price gets pushed back for a while, and after that it often rose again. This pushing back is called a retracement. Fibonacci retracement is a ruler that measures how much of the rise the retracement has given back. In a falling stretch it works the other way round, measuring how much of the fall a rebound has recovered.

Join the starting point of one stretch (the low, for a rising stretch) and its end point (the high), and draw horizontal lines at the heights that divide that range at 23.6%, 38.2%, 50%, 61.8% and 78.6%. For a rising stretch, each level is the price that has come down that much from the high: 50% is halfway between the high and the low, and 61.8% is the price that has come down by 61.8% of the rise.

The drawing shows price being pushed back to the 61.8% level, then rising again past the earlier high. In the real charts below, each horizontal line has its ratio labelled next to the price axis.

Choosing the high and the low

First choose one stretch to measure. For a rising stretch, that is the low where the big rise started and the high where the rise stopped and price began to be pushed back. It is not the lowest or highest point on the whole chart, but where the one move you are looking at started and stopped. In the charts below, there are sometimes candles further left that are lower or higher than the starting point.

Take the low and the high as the lowest and highest prices of the candles, wicks included. The charts in this lesson were drawn that way too. Depending on who draws them, the chosen candles differ slightly and so do the levels, so read each horizontal line as a band, "around here", rather than an exact price, just like the support and resistance lines of lesson 1.

The stretch may not be over yet. If price seems to be pushed back but then closes above the end point, the move has continued, so move the end point to the new high and redraw. If price only pokes above the end point during the day without closing there, leave it as it is.

How to read each level

23.6% is a shallow retracement. When a rise is very strong, price sometimes rests briefly around here and moves on, but do not rush in expecting it to stop here.

The zone from 38.2% through 50% to 61.8% is the heart of this lesson. Retracements often stopped inside this band and went back in the original direction. 50% is not a ratio that comes from the Fibonacci numbers, but as "the level where half the rise has been given back", many people watch it.

78.6% is the last line. A close below it means the retracement has gone so deep that the stretch is almost erased, so drop the plan you built on this stretch.

The ratios are not probabilities. 61.8% does not mean "it stops 61.8% of the time"; it means "the price that has come down by 61.8% of the rise". The chart does not tell you in advance which level price will stop at, or whether it will stop at all. Use the levels to decide in advance "where to watch whether it stops" and "where to get out if you are wrong".

Drag the chart sideways with a finger or the mouse to move it, and pinch with two fingers to zoom in. With a keyboard, click the chart, then use ←/→ to move and +/− to zoom.

Charts by TradingView Lightweight Charts™

100 daily candles of one stock. After hitting a low at candle 18, the price moved sideways for a while, then rose within a few candles to the high of candle 50 as volume jumped. It was then pushed back over several candles, and a candle whose intraday low touched the 50% level appeared. Even so, no candle closed below 50%, and around that time the 20-candle moving average had risen to just below the 50% level. Rising again, the price lingered for a while around and above the 23.6% level, and then candle 80 closed above the earlier high on several times the usual volume. For a few candles after that it sometimes closed back below the high, but it did not go below the 23.6% level, and near the end it was well above the high.

Where to get in and where to stop the loss

In a retracement of a rising stretch, watch whether price comes down to the 38.2–61.8% band and stops. Rather than buying as soon as it touches the band, it is better to get in after a sign that it has stopped, such as a candle near there with a long lower wick or one that closes higher than the day before. In the chart above, the candle that touched the 50% level left a long lower wick, and from the next candle several candles in a row closed higher than the day before.

Put your stop below the line one step deeper than where you got in. If you got in near 50%, get out on a close below 61.8%; if you got in near 61.8%, get out on a close below 78.6%. A close below 78.6% means, in either case, that the plan built on this stretch was wrong, so close the position.

If you are not comfortable getting in on a retracement, you can also wait until price closes above the earlier high. In the chart above, that is the candle that closed above the earlier high as volume jumped. You get more confirmation that the rise is continuing, but you buy at a higher price, and as in the chart above, price sometimes comes back below the high for a few candles after crossing it.

Falling stretches: draw it the other way round

The same ruler applies to a big falling stretch. Join the high where the fall started and the low where it stopped, and draw lines at the heights that have risen from the low by 23.6%, 38.2%, 50%, 61.8% and 78.6% of the fall. This time 23.6% is on the low side and 78.6% on the high side. Rebounds often turned down near the 38.2–61.8% band and fell again, and a close above 78.6% means dropping the idea that the fall will continue.

There is no short selling in the game, so a rebound in a falling stretch is used to decide "do not buy new" and "sell when the rebound turns down if you are holding".

Charts by TradingView Lightweight Charts™

This stock started falling hard from the high of candle 34 and hit a low at candle 64. Further left on the chart there are candles slightly higher than this high, but the stretch to measure was taken from where the big fall started. A few candles after the low, a candle carrying several times the usual volume rose to the 50% level during the day, but closed well below it. For a few candles after that it closed only below the 38.2% level (this height is also where price had lingered for a few candles on the way down), and then it started being pushed down again. Candle 80 closed below the earlier low, and after that it fell further without closing above the low.

Where it overlaps other lines

Rather than looking at a Fibonacci line alone, check whether it overlaps a level where price might stop for other reasons too. A height where price lingered earlier often becomes a place where it stops when it comes back from the other direction, as seen in lesson 1, "Role reversal". The rebound in the falling stretch chart above turned down below the 38.2% level, and that height was also where price had lingered for a few candles on the way down.

The moving average line that moves along with the trend (Basics lesson 3, "Moving averages") is another line to check for overlap. In the rising stretch chart above, around the time the retracement reached the 50% level, the 20-candle moving average had risen to just below it, and no candle closed below that line during the whole retracement.

The more reasons gather at one height, the more weight that level carries. Still, an overlapping level can break too, as the second wrong example below shows. An overlapping level is a reason to "watch here", not a promise that "it stops here".

Wrong examples: the 78.6% level broke

Stopping in the 38.2–61.8% band is common, but not always what happens. In the two charts below, the retracement seemed to stop near 50% but finally went past the 78.6% level. One is a rising stretch, the other a falling stretch.

Charts by TradingView Lightweight Charts™

This stock rose a long way in ten candles from the low of candle 53 and hit a high at candle 63. The retracement rose again after its intraday low almost touched the 50% level, so it looked as if 50% had held. Rising again, the price went above the high twice during the day, but both times it could not close above it. Then it started sliding, closing below the 20-candle moving average from a few candles before candle 80; the candle just before candle 80 closed just below the 61.8% level, and candle 80 closed below the 78.6% level. Two candles later it closed lower than the low where the stretch started, and kept falling a long way after that.

Charts by TradingView Lightweight Charts™

This stock fell hard from the high of candle 20 and hit a low at candle 42. This chart also has higher candles further left, but the starting point was taken where the big fall began. The rebound rose to near the 50% level and could not close above it for more than ten candles. That height was also where price had lingered for a few candles on the way down, so it looked like a heavy level where 50% and an earlier level overlapped. But one candle closed above 50% as volume jumped, the very next candle closed above 61.8%, and candle 80 closed above 78.6%. The falling stretch was almost erased, and the idea that "the rebound turns down at the band and falls again" turned out wrong. Still, the close above 78.6% did not promise a rise either: this chart rose a little more, then moved above and below the 78.6% level, never reached the high where the stretch started, and near the end was just below the 78.6% level.

Why it went wrong

Being held up at one level was not enough. In the rising stretch wrong example, price was held up near 50% and rose again, but it could not close above the high. The confirmation that the rise continues after a retracement is a close above the earlier high, and it never came.
Getting out at the point you set would have meant a much smaller loss than the fall that followed. A close below the moving average came first, then a close below 61.8% and a close below 78.6% in turn. Getting out then would have avoided the fall that went far below the starting low.
Overlapping levels break too. In the falling stretch wrong example, the 50% level overlapped a height where price had lingered earlier and looked heavy, but it was broken by a single candle carrying volume. Overlap is only a reason to watch, and once a close above 78.6% comes, drop the idea of a continued fall.

Using Fibonacci retracement in the game

When a match starts, the first 60 candles are already on the chart. If you see a big rising or falling stretch in them, remember the prices at its start and end. There is no weapon in the game that draws Fibonacci lines, so estimate the levels: 50% is halfway between the two prices, and 38.2% and 61.8% are a little shallower and a little deeper than that. If an equipped moving average passes near there, treat it as an overlapping level. There is no short selling in the game, so a rebound in a falling stretch is used to decide "do not buy new" and "sell if you are holding".

What you see	A common response
After a big rise, price is pushed back to the 38.2–61.8% band and stops	Treat it as a place to buy after a sign that it has stopped, such as a lower wick or a close higher than the day before. Decide in advance to get out on a close below the line one step deeper.
After the retracement, price closes above the earlier high	Read it as confirmation that the rise is continuing and treat it as a place to buy. The price is higher, so set your exit in advance too.
The retracement of a rising stretch closes below 78.6%	Read it as the stretch being almost erased. If you are holding, get out, and do not buy new until a clear point shows up again.
After a big fall, the rebound turns down near the 38.2–61.8% band	Do not buy new. If you are holding, treat the point where the rebound turns down as a place to sell.
The rebound of a falling stretch closes above 78.6%	Drop the idea that the fall will continue. That does not make it a place to buy right away; watch whether a new stretch to measure forms.

Watch out for

The ratios are not probabilities. 50% or 61.8% are only price levels; they do not tell you whether price will stop there. Confirm a stop with the candles.
Do not keep changing the stretch to make it fit. Move the high and low around and any candle will seem to sit on some ratio. Decide first on one stretch that moved a long way, and redraw only when price closes above the end point.
Do not lean on a single line. The five lines are close together, so price is usually near one of them. Choose levels that overlap support, resistance or a moving average, and levels where a sign of stopping has appeared.
Trade count: a match allows up to 10 trades (a buy counts as one and a sell counts as one). Do not buy and sell at every line; get in when a sign of stopping appears in the band, and get out at the point you set.

So far we have looked at shapes and levels. The last lesson covers how to double-check those shapes and levels with the game’s weapons.