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Technical Analysis Guide

Trend Analysis - Fibonacci Retracement

Price correction (retracement) is a short-term, anti-trend price movement. Prices almost never just rise during the uptrend and fall during the downtrend. Even within the same trend, the price can rise and then retrace for a while or vice-versa. The most profitable and less risky positions are positions opened at the end of the retracement. It is therefore important to know how to define the levels at which the trend will resume after a short retracement. Technical analysis has a correction index which uses Fibonacci numbers. The Fibonacci sequence is a series of numbers that takes the previous number and adds it to the current number to get the next number in the sequence. For example, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 etc.

These numbers possess an intriguing number of interrelationships, such as the fact that any given number is approximately 1.618 times the preceding number, and any given number is approximately 0.618 times the following number.

Experienced traders know that in a fast market, the correction is about 0.382 of the price range movement. In a market with average price movements, correction is about half the price range movement. Maximum correction is 0.618, which indicates that the trend is rather weak.

To estimate if a Fibonacci Retracement breakout is true, please refer to the methods used to estimate the trend line breakouts.

In order to draw a Fibonacci Retracement in MetaTrader 4 press the button of the "Line Studies" toolbar:

Line Studies toolbar

Drag the cursor to the uptrend low (downtrend high), click and hold the left mouse button to drag the cursor to the uptrend high (downtrend low) and release the button. Fibonacci Retracement should now appear on the chart. Highlight it by double-clicking, then click the right mouse button to enable the context menu where further settings can be changed.

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