Fibonacci Retracement in the stock market: why traders trust this technique and how to apply it correctly

The Origins of a Revolutionary Mathematical Tool

The history of Fibonacci begins in the 12th century with Leonardo Pisano, an Italian mathematician from Pisa. In his work “Liber Abaci,” he introduced a numerical sequence that would forever change market analysis: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144… Each number is the sum of the two preceding ones, and this pattern generates the famous golden ratio of 1.618.

What’s fascinating is that this series appears constantly in nature: in the human body, in tree branches, in architectural structures, even in masterpieces like the Mona Lisa. Some financial analysts noticed this coincidence and decided to implement these mathematical principles in markets, recognizing that prices follow patterns similar to those in nature.

From Mathematical Theory to the Real Market: How Fibonacci Retracement Works in Trading

When traders talk about Fibonacci retracement in trading, they refer to applying these proportions to predict price levels. Key ratios emerge from the golden ratio: 23.6%, 38.2%, 50%, 61.8%, and 76.4%. These percentages represent points where the price tends to find resistance or support after a strong move.

The concept is simple but powerful: after an asset rises or falls significantly, markets rarely continue in a straight line. The price retraces. Fibonacci retracement in trading allows us to estimate exactly where that bounce will occur, providing a roadmap for placing entry orders, take profits, and stop losses.

Supports and Resistances: The Pillars of Technical Analysis

Before using Fibonacci effectively, every trader must understand two fundamental concepts: supports (floors) and resistances (ceilings). A support is a level where the price tends to bounce upward; a resistance is where it tends to fall downward. When resistance is broken, it becomes support, and vice versa.

The beauty of Fibonacci retracement in trading lies in its provision of these levels objectively. It’s not guesswork; these are mathematical calculations applied to the historical behavior of the price.

Two Real Cases of Fibonacci Trading: Practical Lessons

Case 1: Long-term position trading with EUR/USD

In May, the EUR/USD pair traded at a high of 1.09414, then fell to a low of 1.03489. As the rebound began, Fibonacci retracement was drawn from left to right. A 50-period moving average confirmed confluence near the 61.8% level (1.07139), generating a clear entry signal.

A sell order was placed on May 23 with a stop loss at 1.09414 ( risking 228 pips) and a profit target at 1.01810 ( aiming for 532 pips). The trade reached highs of 1.07783 but maintained its direction. On July 5, it closed with profits after 43 days, generating a risk-reward ratio of 1:2.33. With a lot size of 0.01, the result was $53.2 in gains.

Case 2: Intraday trading combining multiple timeframes

On June 17, EUR/USD showed a downward trend on the daily chart but an upward trend on the hourly chart. Two Fibonacci levels were implemented: one on the hourly chart (black) for entry, another on the daily chart (orange) for the target.

The buy order was triggered at 1.04651 (hourly Fibonacci 61.8% level) with a stop loss at 1.04250 (40 pips risk). The target was set at 1.06011, allowing a risk-reward ratio of 1:3.38. The price touched a minimum of 1.04441 but bounced. The trade closed on June 22 with a profit of $62.5 using a lot size of 0.05.

Fibonacci Extensions: Predicting Bullish Targets

There is a complementary tool called Fibonacci extensions that works inversely. While Fibonacci retracement in trading identifies where a price might fall, extensions project how high it could go after the bounce. This is invaluable for setting more precise profit targets.

The Drawing Strategy: The Golden Rule

Drawing Fibonacci retracement in trading always goes from left to right, regardless of the timeframe or whether it’s an uptrend or downtrend. Always look for the last significant high and low. Some traders consider the entire candle (including wicks), others only the body; this depends on each operator.

Timeframe matters: Fibonacci on daily or weekly charts is more reliable than on 5-minute charts. The longer the timeframe, the greater the effectiveness and potential profit range.

Risk Management: Where to Place Stops and Targets

A conservative trader might place an entry at 61.8%, take profit at 0%, and stop loss at 100%. However, this is pure Fibonacci. Professional practice requires confluences with other indicators such as moving averages, MACD, or additional support-resistance levels.

If the bounce occurs at 38.2%, the stop should be closer (50% or 61.8%), which reduces potential gains. If it bounces at 61.8%, the range is larger but takes longer to consolidate. The decision depends on each trader’s risk profile.

Is Fibonacci retracement really reliable in trading?

By itself, no. Never rely 100% on a single tool. Fibonacci retracement in trading works best as part of a comprehensive strategy that includes fundamental analysis, relevant news, and confirmation from multiple technical indicators.

The professional recommendation is to use Fibonacci across different timeframes simultaneously. Observe what the monthly and daily charts indicate; if both align, confidence increases significantly.

Developing Intuition: Practice Leads to Mastery

With experience, you will discover that certain Fibonacci levels work better in specific markets or under certain conditions. Some traders adjust standard percentages to custom levels. Others identify highs and lows across different timeframes to enrich their analysis.

The best investment a trader can make is time in a demo account. Experiment, fail without risking real money, learn the specific patterns of EUR/USD or the instrument you trade, and then apply that knowledge to the real market. Fibonacci retracement in trading is a proven tool, but mastery requires dedication.