Drawing Fib Retracement Levels on Upwards and Downwards Gold Trend
The price of a XAUUSD metal doesn't move up or down in a straight line. Instead price of Gold 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 a retracement? A retracement is a pullback of the price before the market resumes original trend/original direction of movement.Example of Zigzag Movement: The Example below shows price heading up in a zigzag pattern.
The diagram below shows this movement in an upwards trending 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 pullback starts on a Gold price chart, how do we know where these pull backs/retracements will reach?The answer is we use Fib retracement levels
This is a type of line study used in XAUUSD trading to predict & calculate the market price retracement levels. This gold indicator is placed directly on the price chart within the trading platform provided by your online broker, This Fib retracement levels technical indicator will then automatically calculate these retracement levels on the chart.
What are the Fibonacci Retracement Levels?
23.6% Fib retracement level38.2 % Fibonacci retracement level50.0% Fib retracement level61.8 % Fibonacci retracement level
38.2 % and 50.0 Percent Retracement Levels are the most commonly used and most of the time this is where the pullback will reach - with 38.2 percent% Fib retracement level being the most popular & the most widely used.
61.8% Fib retracement level also is commonly used to set stops for trades opened using this strategy - because price retracement will not get to this retracement level most of the time.
This Fib retracement levels tool will be drawn in the direction of the Gold price trend as explained in the examples below.
How to Draw Fib Retracement Levels on an Upward Market Trend
In the diagram below the XAUUSD price is heading up between 1 & 2 then after 2 it retraces down to 50.00% Fib retracement level pull-back area then it continues heading up in the original upward trend. Notice that this trading indicator is drawn from point 1 to point 2 in the direction of the Gold price trend (Upward trend).
Because we know this is just a retracement/pullback based on our using this trading indicator - Fibonacci retracement level, we put a buy order just between the levels 38.2% and 50.00% retracement levels & our stop loss just below 61.80 % pullback level. If you had put a buy at this point in the trade example below you would have made a lot of pips as shown below.
Fib Retracement Levels Drawn on an Upward Gold Market Trend
Explanation for the Above Fib Retracement Setup Trade Example
Once the Gold price hit the 50.0 percent% Fib retracement level, this zone provided a lot of support for the market price, & afterwards the market then resumed the original upwards trend & continued to move up.
23.6 % Fib retracement level provides minimum support and isn't an ideal place to place an order.
38.2 % Fib retracement level provides some support but price in this example continued to retrace up to the 50 percent% retracement level. Most of the times traders will place their buy limit orders at this level - 38.2 % Fib retracement level.
50.0 % Fibonacci retracement level provides a lot of support and in this example, this was the ideal place which to place a buy order.
For this example, the retracement reached the 50.0 percentage% pull back area, but most of time the market will retrace up to 38.2 % and therefore most of the time traders set their buy limit orders at the 38.2 % Fib retracement level, while at the same time placing their stop loss just below 61.8 % Fib retracement level.
How to Draw Fib Retracement Levels on a Downward Market Trend
In the diagram below the market is moving down between 1 & 2, then after 2 it retraces upto 38.2% Fibonacci retracement level and then it continues heading down in the original downward trend. Notice that this Fib retracement trading indicator is drawn from point 1 to point 2 in the direction of the XAUUSD trend (Downwards trend).
Because we know this is just a pullback we put a sell order at 38.2% Fibonacci retracement level and a stop loss order just above 61.80 % Fibonacci retracement level.
If you had put a sell order at the 38.2 % Fib retracement level as illustrated on the trade below you'd have made a lot of pips afterwards. In this trade the retracement reached 38.2% Fibonacci retracement level and did not get to 50.00% Fibonacci retracement level. From experience it is always good to use 38.2% Fib retracement level when trading XAUUSD metal because most times the pull back does not always get to 50.00% retracement mark.
Fib Retracement Levels Drawn on a Downward Gold Market Trend
Explanation for the Above Fibonacci Retracement Setup Trade Example
The above example is the perfect setup where the price retraces immediately after touching the 38.2 % Fib retracement level.
This Fib retracement level provided a lot of resistance for the price pullback: this was the best place for a trader to place a sell limit order as the market quickly headed down after hitting this 38.2 % Fibonacci retracement level. For this trade a trader would have put their stop loss order at the 61.8 % Fibonacci retracement level.
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