Fibonacci: where a pullback ends

Lesson 11 of 23 in the course “Technical Analysis”. Free, with animations and a quiz.

Numbers from the year 1202

Leonardo of Pisa, known as Fibonacci, described a sequence in his 1202 book Liber Abaci: 1, 1, 2, 3, 5, 8, 13… Each number is the sum of the two before. Dividing neighbours gives about 0.618, and skipping one gives 0.382. Traders use these ratios to estimate where a pullback may end.

How to drag the grid

In TradingView it’s the Fib Retracement tool, Alt+F. In an uptrend the first click goes on the move’s low and the second on its high. The grid shows where 38.2%, 50% and 61.8% of the pullback are. Drag from the extremes, that is the wicks, and do it the same way every time: then your levels match those of thousands of other traders.

The golden pocket and the red line

The 50–61.8% zone is the most popular place to enter with the trend: the pullback is real and the trend is still intact. 38.2% is a sign of a very strong trend. 78.6% is a deep pullback; without a signal it’s better to stay out. And if price goes beyond 100%, below the start of the move, it’s no longer a pullback: the idea is cancelled and the stop should have fired.

Rules that save you

Fibonacci isn’t magic. It works because everyone sees it, and because pullbacks of about half a move are common anyway. So a Fib level is a place to watch, not a place to buy blindly. It’s best when 61.8% lines up with a horizontal level or a trendline. Now in the trainer you’ll drag the grid yourself and find where the pullback ended.

Check yourself

1. The rise went from 100 to 140. Where is the 61.8% retracement?
   Correct answer: About 115.3. The move is 40. A 61.8% pullback from the top: 140 − 0.618 × 40 = 115.3. 124.7 is 38.2%, and 161.8 isn’t a pullback at all.
2. How do you drag Fibonacci in an uptrend?
   Correct answer: From the move’s low to its high, wick to wick. In an uptrend you measure the pullback of the rise, so the start is the low and the end is the high. High to low is for a downtrend.
3. Price pulled back below the 100% Fib level, below the start of the rise. What does it mean?
   Correct answer: It’s no longer a pullback: the buy idea is cancelled. A pullback below the start broke the trend structure. Redrawing the grid to justify a loss is a common trap.

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