Drawing Fibonacci Retracement Levels on Upward and Downwards Trend

The price on a chart does not move upward or downwards 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 retracement levels are 38.2 %, 50 % and 61.8%. These form the points at which the price is likely to make a retracement.

What is retracement? It is a pull-back of the price before the market resumes the initial 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 upwards market.

Zigzag With Fibonacci Levels - How to Interpret/Analyze Fib Retracement Levels Indicator on Charts

1-2: Price moves up

2-3: Pull-back

3-4: Moves up

4-5: Pullback

5-6: Moves up

Since we can identify 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 technical indicator is placed directly on the chart within the platform provided by your broker, This trading indicator then will automatically calculate these technical levels on the trading chart.

What are The Retracement Levels

23.6 %
38.2%
50.0 %
61.8%

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

61.80% is also commonly used to set stops for trade transactions opened using this strategy.

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

How to Draw on an Upward Bullish Market

In the diagram below the price is heading up between 1 & 2 then after 2 it retraces down to 50.00 % pull-back area then it continues moving upward in the initial upward trend. Notice that this technical indicator is drawn from point 1 to point 2 in the direction of the trend (Upwards).

Because we know this is just a pull-back based on trading strategy of using this trading 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 trade at this point in the trade example shown & described below you would have made a lot of pips on the trade position.

Fib Retracement on Charts - Fibonacci Retracement Levels on Upwards Trend and on Downward Trend

Explanation for the Above XAUUSD Example

Once the Gold trade hit the 50.0 % level, this zone provided a lot of support for 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 the price in this example continued to retrace upto 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 retracement reached the 50.00% pull-back area, but most of the time the market will retrace up to 38.2 % and thenceforth most of the times traders set their buy limit orders at the 38.2 % level, while at the same time setting a stop just below 61.8%.

How to Draw on a Downward 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 downward in the initial downward trend. Notice that this technical indicator is drawn and plotted from point 1 to point 2 in the direction of the market 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 like is displayed on the Gold trade below you'd have made a lot of pips afterwards. In this trade the market retracement reached 38.2% point & did not get to 50.00 % mark. From experience it is always good to use 38.20% because majority of the times the retracement does not always get to 50.00 % mark.

How Do You Read Fibonacci Retracement Levels Technical Indicator?

Explanation for the Example Above

The above illustrations is the perfect set-up where the market retraces immediately after touching the 38.20% Level.

This zone provided a lot of resistance for the retracement, this was the best place for an investor to place a sell limit order as the market quickly headed down after touching this level.

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