How to Use Fibonacci Retracement and Extension Levels (With a Worked Example)
Fibonacci levels are lines drawn between a swing low and a swing high that mark where a price move often pauses before it continues. This guide shows how to find them, with every number worked out, and how to turn them into an entry, a stop and a target.
The examples use EUR/USD, where one pip is worth $10 per standard lot. You can check every level in the Fibonacci calculator.
What are Fibonacci retracement levels?
After a strong move, price often gives back part of it. A retracement level is a price that sits a fixed share of the way back along that move. The shares come from the Fibonacci sequence:
- 23.6%, 38.2%, 61.8% and 78.6% come from ratios between numbers in the sequence.
- 50% is not a true Fibonacci ratio. Traders add it because it is the halfway point of the move.
- 61.8% is called the golden ratio and is the level most traders watch.
These levels are reference points, not rules. No level is guaranteed to hold, and price can pass straight through any of them.
How to draw them in four steps
- Find a clear move with an obvious swing low and swing high. A choppy sideways chart gives meaningless levels.
- Note the two prices: the swing low (the start of an uptrend) and the swing high (the end).
- The range is high minus low. Each retracement level is the high minus the range times the ratio, because price pulls back down from the high.
- For a downtrend do the reverse: the level is the low plus the range times the ratio.
Worked example on EUR/USD
EUR/USD rises from a swing low of 1.0800 to a swing high of 1.1000. The range is 1.1000 – 1.0800 = 0.0200, which is 200 pips. Price now pulls back. The retracement levels are:
- 23.6%: 1.1000 – (0.0200 x 0.236) = 1.09528
- 38.2%: 1.1000 – (0.0200 x 0.382) = 1.09236
- 50.0%: 1.1000 – (0.0200 x 0.500) = 1.09000
- 61.8%: 1.1000 – (0.0200 x 0.618) = 1.08764
- 78.6%: 1.1000 – (0.0200 x 0.786) = 1.08428
Say price falls to the 61.8% level at 1.08764 and shows signs of turning up. A trader decides to buy there with the stop just below the 78.6% level, at 1.0840, and the swing high of 1.1000 as the first target:
- Stop distance: 1.08764 – 1.0840 = 0.00364, which is 36.4 pips.
- Target distance: 1.1000 – 1.08764 = 0.01236, which is 123.6 pips.
- Reward to risk: 123.6 / 36.4 = about 3.4 to 1.
With a $10,000 account that risks 1%, the risk is $100. Lot size = $100 / (36.4 pips x $10 per pip) = 0.27 lots when rounded down to the 0.01 step. At that size:
- Loss if the stop is hit: 0.27 x 36.4 x $10 = $98.28.
- Profit if the target is hit: 0.27 x 123.6 x $10 = $333.72.
The EUR/USD lot size calculator does the sizing for you, the EUR/USD stop loss calculator places the stop for a lot size, and the EUR/USD risk/reward calculator compares the two distances.
What are Fibonacci extension levels?
Extension levels sit beyond the end of the original move and are used for targets once price breaks past the old high. On our calculator the extension of an uptrend is the swing low plus the range times the ratio:
- 127.2%: 1.0800 + (0.0200 x 1.272) = 1.10544
- 138.2%: 1.0800 + (0.0200 x 1.382) = 1.10764
- 161.8%: 1.0800 + (0.0200 x 1.618) = 1.11236
- 200.0%: 1.0800 + (0.0200 x 2.000) = 1.12000
If the trade above is aimed at the 127.2% extension at 1.10544 instead of the swing high, the target distance is 1.10544 – 1.08764 = 0.0178, which is 178 pips, and the reward to risk becomes 178 / 36.4 = about 4.9 to 1. A farther target pays more, but price has to travel farther to reach it.
Which levels matter most?
Many traders pay most attention to 38.2%, 50% and 61.8%. A shallow pullback to 38.2% suggests a strong trend, a pullback to 61.8% a weaker one, and a move beyond 78.6% often means the trend is in doubt. These are habits of the market, not laws, so use them as one more piece of evidence next to the trend, support and resistance, or a candle pattern.
Common mistakes
- Drawing from the wrong swing. Different swings give different levels. Use the most obvious move on the timeframe you trade.
- Trading the level alone. A touch of 61.8% is not a signal. Wait for something else to agree.
- Placing the stop at the level. Put the stop just beyond the next level, as in the example, so ordinary movement does not trigger it.
- Ignoring position size. A tight stop near a level needs a size that keeps the loss at your limit, which is what the lot size calculator is for.
Key facts
- Retracement levels after an uptrend = swing high – (range x ratio). After a downtrend = swing low + (range x ratio).
- The usual ratios are 23.6%, 38.2%, 50%, 61.8% and 78.6%; extensions are 127.2%, 138.2%, 161.8% and 200%.
- The levels work the same on any market and any timeframe, and none of them is guaranteed to hold.
- Always size the trade from the stop distance, not from how confident the level looks.