How to draw Fibonacci retracements.

A Fibonacci retracement tool needs two clicks. Pick the wrong two points and every level it draws is wrong, however neat it looks on the chart.

Which point you click first depends on the direction of the trend, and a drawing stops being useful once the move it measures has changed.

What do the two anchor points measure?

The tool measures one completed price move. The first anchor is where the move started and the second is where it ended. The levels then show how much of that move price has given back.

The previous lesson listed the usual ratios: 23.6%, 38.2%, 50%, 61.8% and 78.6%. A 38.2% retracement means price has handed back 38.2% of the distance it travelled.

The arithmetic is the same in both directions. Each level is the end price, moved back toward the start by that share of the move's size.

How do you pick a swing high and a swing low?

Look at a peak where the candles on both sides have lower highs. That peak is a swing high. A swing low is the mirror image: a trough with higher lows on both sides. The market structure lesson covers both in more detail.

A common working rule asks for at least two candles on each side. You can use three or five instead, as long as you use the same number every time.

Before you click, check these points:

• The move between the two anchors runs clearly in one direction.
• The swing at the end is complete, so price has already turned away from it.
• Each anchor is the true extreme: the lowest low and the highest high of the move, not a candle beside it.
• You use wicks for both anchors, or bodies for both, and never mix them.

Wicks record the actual highest and lowest prices traded, which makes them the natural choice for most charts.

The timeframe decides which swings count. A clear swing on a 15 minute chart can be a small wiggle on the daily chart, so draw on the chart you use to make decisions.

How do you draw it in an uptrend?

In an uptrend you click the swing low first, then drag to the swing high. You are measuring the rise, so the levels appear below the high, where a pullback might pause.

Take an illustrative EUR/USD rise from a swing low of 1.08000 to a swing high of 1.10000. Work it out step by step:

1. The size of the move is 1.10000 minus 1.08000 = 0.02000, which is 200 pips.
2. 38.2% of 200 pips is 76.4 pips, so the level is 1.10000 minus 0.00764 = 1.09236.
3. 50% of 200 pips is 100 pips, so the level is 1.10000 minus 0.01000 = 1.09000.
4. 61.8% of 200 pips is 123.6 pips, so the level is 1.10000 minus 0.01236 = 1.08764.

The full set of levels for this move:

Your platform should print the same prices beside its lines. Some platforms label the end of the move 0% and others label it 100%, so trust the prices, and check that the 23.6% line sits closest to the swing high.

The Fibonacci calculator gives the same levels from two prices, which is a quick way to test a drawing.

How do you draw it in a downtrend?

A downtrend reverses the order. You click the swing high first, then drag down to the swing low. The levels now appear above the low, where a bounce might stall.

Take an illustrative USD/JPY fall from a swing high of 152.000 to a swing low of 148.000. On a yen pair one pip is 0.01.

1. The size of the move is 152.000 minus 148.000 = 4.000, which is 400 pips.
2. 38.2% of 400 pips is 152.8 pips, so the level is 148.000 plus 1.528 = 149.528.
3. 50% of 400 pips is 200 pips, so the level is 148.000 plus 2.000 = 150.000.
4. 61.8% of 400 pips is 247.2 pips, so the level is 148.000 plus 2.472 = 150.472.

In the downtrend the 61.8% level is the highest of the three. A bigger retracement here means a bigger bounce up from the low.

One rule covers both cases: the first click goes on the start of the move and the second on its end. Which way you drag on screen follows from that.

When should you redraw or drop the levels?

A drawing belongs to one move. When the move changes, the drawing has to change too.

Say the EUR/USD rise pauses, then climbs to a new high of 1.10600. The old high is no longer the end of the move, so you keep the swing low at 1.08000 and move the second anchor up.

The move is now 1.10600 minus 1.08000 = 260 pips. Half of that is 130 pips, so the new 50% level is 1.10600 minus 0.01300 = 1.09300, which is 30 pips above the old 50% level at 1.09000.

Price can also break the other way. If an uptrend pullback falls below the swing low, the 100% level, it has erased the whole rise, and levels drawn on that rise no longer describe a pullback.

Sideways markets fit the tool poorly. With no clear trend, any pair of points you choose is arbitrary, so read the trending versus ranging lesson before you draw.

What mistakes make the levels misleading?

Several errors come from the clicks themselves:

• Anchoring on a candle near the extreme instead of the extreme itself, which shifts every level, sometimes by many pips.
• Clicking in the wrong order, which swaps the 38.2% and 61.8% labels, so a shallow pullback reads as a deep one.
• Moving the anchors until a line touches a candle. The fit then comes from your editing and tells you nothing new about price.
• Reading a line as an exact price. Treat each level as a zone a few pips wide, as with support and resistance zones.

Be realistic about what the levels can do. With five or six lines spread across a pullback, price will often sit near one of them by chance.

Published evidence that Fibonacci ratios mark turning points better than other evenly spaced levels is thin and mixed. One argument for them is that many chart users watch the same prices, and that idea is hard to test.

So it helps to look for a second, separate reason at the same price. The next lesson pairs Fibonacci levels with support and resistance.