Drawing Fibonacci Retracement Areas on Upward and Downward Trend

The stock indices trading price on a stock indices chart does not move up or down in a straight line. Instead it moves up or down in a zigzag pattern. Fibonacci Retracement is the tool used to calculate where the zigzag will stop. The pullback levels are 38.2%, 50% and 61.8%. These form the points at which the stock indices trading market is likely to make a retracement.

What is retracement? It is a pullback of the stock indices trading price before the stock indices trading market resumes the original trend/original direction of movement.

Example of Zigzag Movement: The Examples below shows stock indices trading price heading upwards in a zigzag pattern.

The diagram below shows movement in an upwards market.

1-2: Price moves up

2-3: Pullback

3-4: Moves up

4-5: Pullback

5-6: Moves up

Since we can spot where a pull-back starts on a Stock Indices chart, how do we know where it will reach?

The answer is we use Fib retracement tool.

This is a type of line study used in indices trading to predict and calculate these levels. This indicator is placed directly on the stock indices chart within the platform provided by your broker, This indicator will then automatically calculate these levels on the chart.

What are The Retracement Levels

• 23.6 %
• 38.2 %
• 50.0 %
• 61.8 %

38.2% and 50.0% Levels are the most used and most of the time this is where the pull back will reach. With 38.2% being the most popular & most widely used.

61.8% is also oftenly used to set stops for trades opened using this strategy.

This tool will be drawn in direction of the trend as described in the example below.

How to Draw on an Upward Bullish Market

In the diagram below the stock indices trading price is moving up between 1 and 2 then after 2 it retraces down to 50.0% pull back area then it continues moving up in the original upward trend. Notice that this indicator is drawn from point 1 to point 2 in direction of the trend (Upward).

Because we know that this is just a pull-back based on strategy of using this technical indicator, we put a buy order just between the levels 38.2% and 50.0% and our stoploss just below 61.80% pull back mark. If you had put buy at this point in the trade examples explained below you would have made a lot of pips.

Explanation for the Above Stock Indices Trading Example

Once the trade hit the 50.0 % level, this zone provided a lot of support for the indices trading price, & afterward the stock indices trading market then resumed the original up trend & continued to move upward.

23.6% provides minimum support & isn't an ideal place to place an order.

38.2 % provides some support but stock indices trading price in this example continued to retrace up to the 50% zone.

50.00% provides a lot of support & in this example, this was the ideal place to set a buy order.

For this example, the pull back reached the 50.00% pull back area, but most of the time the stock indices trading market will retrace up to 38.2 % and therefore most of the time traders set their buy limit orders at the 38.2 % level, while at the same time placing a stop just below 61.8 %.

How to Draw on a Downward Bearish Market

In the diagram below the stock indices trading market is moving down between 1 and 2, then after 2 it retraces up to 38.2% retracement then it continues moving down in the original downward trend. Notice that this indicator is drawn from point 1 to point 2 in direction of the trend (Downward).

Because we know this is just a pull back we put a sell order at 38.20% level and a stop loss just above 61.80%.

If you had put sell order at the 38.20% level as displayed on the trade below you would have made a lot of pips afterwards. In this trade the retracement reached 38.2% point and did not get to 50.00% mark. From experience it is always good to use 38.20% because most times the pull-back doesn't always get to 50.0% mark.

Explanation for the Above Indices Trading Example

The above example is the perfect setup where the stock indices trading price retraces immediately after touching the 38.2 % Level.

This zone provided a lot of resistance for the pull back, this was the best place for an investor to place a sell limit order as the stock indices trading market quickly moved down after hitting this level.