Drawing Fibo Retracement Levels on Upward and Downward Trend

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

What's retracement? It is a pull-back of the price before the market resumes the original trend/original direction of movement.

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

The diagram below shows movement in an upward market.

Zigzag With Fibonacci Levels - How to Analyze Fibo Retracement Levels Indicator on Charts

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 XAUUSD 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 gold trading to predict and calculate these levels. This indicator is placed directly on the chart within the platform provided by your broker, This trading indicator will then automatically calculate these levels on the trading chart.

What are The Retracement Levels

23.6 %
38.2%
50.0 %
61.8%

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

61.80% is also commonly used to set stops for trades opened using this trading strategy.

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

How to Draw on an Upwards Bullish Market

In the diagram below the price is heading up between 1 & 2 then after 2 it retraces down to 50.00 % pullback area then it continues moving up in the original upwards trend. Notice that this trading indicator is drawn from point 1 to point 2 in the direction of the trend (Upwards).

Because we know this is just a pullback based on strategy of using this indicator, we put a buy order just between the levels 38.20% & 50.00% and our stop loss order just below 61.8 % pull-back mark. If you had put a buy at this point in the trade example illustrated & described below you would have made a lot of pips on the trade transaction.

Fib Retracement on Charts - Fibo Retracement Levels on Upward Trend and on Downward Trend

Explanation for the Above XAUUSD Example

Once the trade hit the 50.0 percentage% level, this zone provided a lot of support for the price, & afterwards market then resumed the original up trend & continued to move upwards.

23.60% provides minimum support and is not an ideal place to open an order.

38.2 % provides some support but price in this example continued to retrace up to the 50 percent 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% pullback area, but most of the time the market will retrace up to 38.2 % and thenceforth most of the time traders set their buy limit pending orders at the 38.2 percent% level, while at the same time placing a stop just below 61.8%.

How to Draw on a Downwards Bearish Market

In the diagram below the market is moving down between 1 & 2, then after 2 it retraces upto 38.20 % retracement then it continues moving down in the original downwards trend. Notice that this technical indicator is drawn from point 1 to point 2 in the direction of the trend (Downwards).

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 & did not get to 50.00 % mark. From experience it's always good to use 38.20% because most times the pull-back does not always get to 50.00 % mark.

How Do You Read Fibo Retracement Levels Indicator?

Explanation for the Above Example

The above examples is the perfect set-up where the price retraces immediately after touching the 38.20% 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 market quickly headed down after hitting this level.

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