Drawing Fibonacci Retracement Levels on Upwards & Downwards Gold Trend
The price of a XAUUSD metal doesn't move up or down in a straight line. Instead price of Gold moves upward or downward in a zigzag pattern. Fib Retracement is the trading tool used to calculate where the zigzag will stop. The pull-back levels are 38.2%, 50 % & 61.8%. These form the points at which the market is likely to make a retracement.
What's a retracement? A retracement is a retracement of the price before the market resumes the original trend/original and initial direction of movement.Example Illustration 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: Pull back 3-4: Moves up 4-5: Pull-back 5-6: Moves up
Since we can spot where a retracement starts on a Gold price chart, how do we know where these pullbacks will reach?The answer is we use Fibonacci 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 areas technical indicator will then automatically calculate the retracement levels on the chart.
What are the Fibonacci Retracement Levels?
23.6% Fib retracement38.2 % Fib retracement50.0% Fib retracement61.8 % Fib retracement
38.2 % & 50.0 Percent Retracement Levels are the most commonly used and most of the time this is where the pull-back 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 areas tool will be drawn in the market direction of the Gold price trend as presented 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 point 1 & 2 then after 2 it retraces downward to 50.00% Fib retracement pull-back area then it continues heading up in the original upward trend. Notice that this technical indicator is drawn from point 1 to point 2 in the market direction of the Gold price trend (Upward trend).
Because we know this is just a retracement/pullback based on our using this technical indicator - Fib retracement, we put a buy order just between the levels 38.2% & 50.00% retracement levels and our stop loss just below 61.80 % retracement 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 Fibonacci Retracement Setup Trade Example
Once the Gold price hit the 50.0 percent% Fib retracement level, this level 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 very minimal support and isn't an ideal place to place an order.
38.2 % Fib retracement provides some support but the 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 this technical level- 38.2 % Fib retracement.
50.0 % Fib retracement provides a lot of support and in this example, this was the ideal place which to place a buy order.
For this illustration, the price 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.
How to Draw Fib Retracement Levels on a Downward Market Trend
In the diagram below the market is moving down between point 1 & 2, then after 2 it retraces upto 38.2% Fib retracement and then it continues heading down in the original downward trend. Notice that this Fib retracement trading indicator is plotted from point 1 to point 2 in the market direction of the XAUUSD trend (Downwards trend).
Because we know this is just a pull back we put a sell order at 38.2% Fib retracement and a stop loss order just above 61.80 % Fib retracement.
If you had put a sell order at the 38.2 % Fib retracement as shown on the trade below you'd have made a lot of pips afterwards. In this trade the price retracement reached 38.2% Fib retracement and did not get to 50.00% Fib retracement. 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.
This Fib retracement provided a lot of resistance for the price pull-back: 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 % Fib retracement. For this trade a trader would have put their stop loss order at the 61.8 % Fib retracement.
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