Fibonacci Retracement in Forex: Levels, How to Draw, Example

At a glance

Typical levels

23.6, 38.2, 50, 61.8%

Drawn

Between a swing low and high

50% level

Not a Fibonacci ratio

Main limit

Depends on the swing chosen

What is Fibonacci retracement?

Fibonacci retracement is a way of marking how far a price may pull back after a move, as a percentage of that move. After EUR/USD rises from 1.0800 to 1.1000, for example, a 50% retracement would take it back to 1.0900. Charting tools typically draw 23.6%, 38.2%, 50% and 61.8%, and draw them automatically between two points you choose.

Traders use the levels as possible support after a rise or resistance after a fall: support and resistance.

Where do the Fibonacci levels come from?

The Fibonacci sequence starts 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, and each number is the sum of the two before it. The Italian mathematician Leonardo of Pisa, known as Fibonacci, is credited with introducing it to the West. Ratios between its numbers settle towards fixed values:

Ratio	Example	Level
A number ÷ the next	34 ÷ 55 ≈ 0.618	61.8%
A number ÷ the one two places on	34 ÷ 89 ≈ 0.382	38.2%
A number ÷ the one three places on	34 ÷ 144 ≈ 0.236	23.6%

The 50% level is not a Fibonacci ratio; it is included because a pullback of about half a move is a long-standing idea in technical analysis, going back to Dow Theory.

How to calculate and draw Fibonacci retracement levels

In an uptrend, draw from the swing low to the swing high; in a downtrend, from the swing high to the swing low. The levels sit between the two points:

After a rise: level = high − (high − low) × ratio · after a fall: level = low + (high − low) × ratio

Retracement levels of a EUR/USD rise (illustrative prices)

Assumptions: EUR/USD rises from a swing low of 1.0800 to a swing high of 1.1000, a move of 0.0200 (200 pips).

• 23.6%: 1.1000 − 0.0200 × 0.236 ≈ 1.0953
• 38.2%: 1.1000 − 0.0200 × 0.382 ≈ 1.0924
• 50%: 1.1000 − 0.0200 × 0.5 = 1.0900
• 61.8%: 1.1000 − 0.0200 × 0.618 ≈ 1.0876

The hardest part is choosing the swing. Two traders measuring different highs and lows get different levels, which is one reason the levels are a guide rather than exact prices.

Using Fibonacci levels with a stop loss

A retracement level can mark where a trade is planned, with the stop beyond the next level and the position sized from that distance: position sizing.

A long trade at the 50% level (illustrative prices)

Assumptions: the EUR/USD rise above; $10,000 US dollar account; risk 1% ($100); entry at the 50% level, 1.0900; stop at 1.0865, below the 61.8% level; target at the swing high, 1.1000; one pip on 1 standard lot is worth $10; spread, commission and swap excluded.

• Stop distance: 1.0900 − 1.0865 = 35 pips. Target distance: 1.1000 − 1.0900 = 100 pips.
• Position size: $100 ÷ (35 × $10) ≈ 0.286, rounded down to 0.28 lots.
• If the stop is hit: 35 × $10 × 0.28 = $98 loss. If the target is hit: 100 × $10 × 0.28 = $280 profit.

Gaps and slippage can make a loss larger than planned: risk-reward ratio, position size calculator.

Limits of Fibonacci retracement

• Subjective swings: the levels depend on which high and low are chosen.
• Many levels: with four or five levels close together, price will usually be near one of them, which can make them look more accurate in hindsight than they are.
• No forecast: price can turn at any level or pass through all of them.
• Research: a 2007 review in the Journal of Economic Literature found technical analysis widespread in currency markets and reported that it “may be profitable”; that does not show that Fibonacci levels work for a retail trader after costs.

Write the levels, the stop and the risk into the plan before entry: stop loss.