How to Use Fibonacci Retracements to Identify Entry and Exit Zones in Trades

In the world of technical analysis, Fibonacci retracements are considered one of the essential tools traders rely on to identify potential support and resistance levels, and thus determine ideal entry and exit zones for trades.

This tool is based on the mathematical ratios discovered by the Italian mathematician Leonardo Fibonacci, which frequently appear in nature as well as in financial markets.

First: What Are Fibonacci Retracements?

Fibonacci retracements are horizontal levels drawn on a chart to identify areas where the price might temporarily stop or reverse during a correction of a major trend.

The most commonly used Fibonacci levels are:
23.6% – 38.2% – 50% – 61.8% – 78.6%.
These levels represent expected retracement ratios of price movements.

Second: How to Draw Fibonacci Retracements?

To draw the Fibonacci tool correctly:
    1. Identify a strong directional move (uptrend or downtrend).
    2. In an uptrend: draw the tool from the bottom to the top.
    3. In a downtrend: draw it from the top to the bottom.
    4. The different levels will automatically appear between the starting and ending points.

Third: How to Use Fibonacci to Identify Entry and Exit Zones

1. Determining Entry Zone:
When price makes a strong move (up or down), it often retraces to certain levels before continuing in the same direction.
The key Fibonacci levels (especially 38.2% and 61.8%) are ideal areas to look for entry signals.

It’s preferable to wait for additional confirmation like reversal candlesticks or other technical indicators before entering.

Example:

    • In an uptrend: If price retraces to the 61.8% level and shows a bullish engulfing candle, this could be a buying opportunity.
    • In a downtrend: If price rebounds from 61.8% and shows a bearish reversal candle, it could be a selling opportunity.

2. Determining Stop Loss Zone:
Stop loss is often placed just below or above the next Fibonacci level.
For example: if you enter a buy trade at 61.8%, you could place the stop loss below 78.6%.

3. Determining Take Profit Zone:
Targets can be based on previous price movement levels or using Fibonacci extensions.
    • The first target is usually the return to the previous high or low.
    • Further targets could be at extensions like 127.2% or 161.8%.

Fourth: Practical Tips When Using Fibonacci Retracements

    • Don’t rely solely on Fibonacci; combine it with other tools like trend lines, price patterns, and technical indicators.
    • Always look for confluence of multiple technical signals to increase the accuracy of entry and exit points.
    • The 50% and 61.8% levels are usually the strongest in Forex, stocks, and crypto markets.
    • Try using it on medium to long timeframes (like 1-hour, 4-hour, or daily) for more reliable results.