Fibonacci Retracement in the Stock Market: The Tool Every Trader Should Master

Have you ever wondered how some traders predict where the price will bounce? The answer lies in a tool that has been with us for centuries: Fibonacci retracements. Despite its complicated name, understanding how this technical analysis method works can be the difference between profits and losses.

The Origin of Fibonacci and Its Magic in the Markets

Over 800 years ago, Leonardo Pisano, an Italian mathematician from Pisa, discovered a particular number sequence: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144… Each number is the sum of the two previous ones. The fascinating thing is that this golden ratio (1.618) appears constantly in nature: in tree branches, seashells, and the human body.

Technical analysts found this too valuable to ignore. If Fibonacci is in nature, why wouldn’t it be in financial markets? And so they discovered that the ratios derived from this series (61.8%, 38.2%, 50%, 76.4%, 23.6%) function as natural support and resistance levels where prices tend to bounce.

How Does Fibonacci Retracement Work in the Stock Market?

The first thing you need to understand: markets are not linear. An asset rises, rises, and then retraces. This is where Fibonacci comes in.

Imagine a stock or currency pair with a clear upward trend. Suddenly, it starts to fall. How far will it fall before bouncing back? Fibonacci retracement in stocks gives you the answer. It divides the distance between the high and low into specific proportions, creating levels where the price could find support.

The most common levels are:

• 23.6%: The weakest bounce, quick recovery but limited movement
• 38.2%: Moderate bounce, risk-reward balance
• 50%: Psychological level, equal chance of going up or down
• 61.8%: The strongest level, where many traders enter; allows for larger profit runs
• 76.4%: Deep retracement, indicates weakness in the trend

The secret? The deeper the retracement, the longer it takes to consolidate, but the greater the profit potential. A bounce at 23.6% will quickly lead to the previous high, but yield little profit. A bounce at 61.8% will require patience, but profits can triple.

How to Correctly Draw Fibonacci

The golden rule: always from left to right, connecting the last low and the last high of the trend. It doesn’t matter if it’s an uptrend or downtrend, the timeframe (1 minute, 1 hour, 1 day, 1 week) doesn’t matter; the drawing is the same.

Many traders debate whether to include the “wick” of the candle or just the body. The truth is, both methods work; it depends on your style and what has given you better results over time.

Fibonacci Retracement in Stocks: Practical Cases That Work

Case 1: Long-Term Trade (Position Trading)

We observe EUR/USD on a daily timeframe with a clear downtrend. The high was at 1.09414 (May), and the low was at 1.03489. When the market started to rise, we drew Fibonacci.

We combined this with a 50-period EMA (our confluence). The moving average crossed near the 61.8% level of our Fibonacci, exactly where we wanted to enter.

• Entry: May 23 at 1.07139
• Stop Loss: 1.09414 (the previous high, 228 pips risk)
• Take Profit: 1.01810 (532 pips gain, using Fibonacci extensions)
• Risk-Reward Ratio: Better than 1:2

The price reached a high of 1.07783 (temporary loss of 65 pips) but continued downward. The order closed at TP on July 5 with a profit of $53.2 (lot size 0.01). Total time: 1 month and 13 days.

Case 2: Intraday Trade (Day Trading)

The same EUR/USD, but on a 1-hour timeframe on June 17. The daily chart showed a general downtrend, but the hourly chart had bullish momentum.

Here we applied Fibonacci retracement in two different timeframes:

• Black Fibonacci (1 hour): for short-term entry
• Orange Fibonacci (1 day): for the final target

This gave us clear confluences. We bought at the 61.8% level of the hourly chart (1.04651), but our TP could not exceed the 61.8% of the daily chart (1.06157).

• Entry: June 17 at 1.04651
• Stop Loss: 1.04250 (40 pips, just below the 78.6%)
• Take Profit: 1.06011 (150 pips)
• Risk-Reward Ratio: 1:3.75

The lowest reached was 1.04441 (temporary loss of 21 pips). It closed at TP on June 22 with a profit of $62.5 (lot size 0.05).

The Importance of Confluences

Here’s the critical part: never use Fibonacci alone. By itself, Fibonacci retracement in stocks is not 100% reliable.

It works best when you have confluences, meaning multiple tools point to the same level:

• Fibonacci + Moving Average
• Fibonacci + historical support/resistance levels
• Fibonacci + fundamental analysis
• Fibonacci + important news
• Fibonacci + candlestick patterns

In the previous examples, we used Fibonacci + EMA. That doubled our confidence in the trades.

Does It Work in All Markets?

Yes. Fibonacci retracement works in:

• Stocks
• Currencies (Forex)
• Indices
• Cryptocurrencies
• Commodities
• Any financial asset

And yes, it works better on higher timeframes. A Fibonacci on a daily chart is more reliable than one on a 5-minute chart.

Key Tips to Master Fibonacci

Entry order: The 61.8% level is the classic among traders. It offers good risk-reward without being in panic zone.

Stop Loss: Place it at the 100% level (the previous extreme). It’s your line of defense.

Take Profit: Use Fibonacci extensions (the levels in blue on the charts), not just retracements. That’s where the real money is.

Risk management: If you risk $22.8, you should aim to make at least $53.2. Otherwise, the trade isn’t worth it.

The Learning Journey

Here’s the uncomfortable truth: no tool works all the time. Fibonacci is powerful, but it requires practice. The more you use Fibonacci retracement in stocks, the more you’ll discover which levels are stronger in your favorite asset, the best entry points for your trading style, and which confluences work best for you.

It’s best to practice first on a demo account. Open 10, 50, 100 trades using Fibonacci and see what works. Some traders adjust the percentages to custom levels that have given them better results. The tool is flexible.

The key: It’s not the tool, it’s how you use it. Fibonacci gives you the lines, but success depends on your discipline, risk management, and patience for the right confluence.