Fibonacci retracements and extensions

⚠️ Risk warning: CFDs and leveraged forex are complex instruments with a high risk of losing money rapidly. Most retail accounts lose money. This content is education only, not investment advice or a recommendation.

Fibonacci retracement is a drawing tool. You pick one completed swing, and the tool splits its height at fixed ratios: 23.6%, 38.2%, 50%, 61.8% and 78.6%. During a pullback, traders watch these levels as possible areas where the pullback might end. The ratios have no power of their own. They matter only because many people watch them, and they help you measure how deep a pullback is.

How to draw it

Choose a clear, completed swing on the timeframe you are trading: in an uptrend, from a swing low to the swing high that follows it. In a downtrend, from a swing high to the swing low.
Anchor on the wicks (the extreme high and low) and stay consistent. Different anchors give different levels, which is one reason not to treat any level as exact.
Redraw only when the swing changes. If price makes a new high, the swing is new and so is the drawing.

Reading the levels

38.2%: a shallow pullback, common in strong trends.
50%: not a Fibonacci ratio, but widely watched as the halfway point.
61.8%: a deeper pullback. Many traders treat the area between 50% and 61.8% as the main zone to watch.
78.6% and beyond: a very deep pullback. If price closes beyond the start of the swing (100%), the swing is broken and the drawing no longer describes the trend.

Treat each level as an area, not a line. A level is more interesting when something else agrees with it, such as an old support or resistance level or a trendline. That is the subject of the confluence lesson.

Extensions

Extensions project beyond the swing. A common approach uses the same drawing: the 1.272 and 1.618 levels above the swing high (in an uptrend) mark how far a new leg would travel if it extended the old swing by those ratios. Use them as references for planning a target and checking whether the reward is worth the risk. They are not a forecast.

Worked example: gold (XAU/USD), H4. The figure uses drawn prices. Gold rallies from a swing low at 3,880 to a swing high at 3,980, a swing of 100. The retracement levels are 3,956 (23.6%), 3,942 (38.2%), 3,930 (50%), 3,918 (61.8%) and 3,901 (78.6%). The pullback ends at 3,919, just above the 61.8% level, and price then climbs to a new high. The 1.272 extension of the swing is 3,880 + 127.2 ≈ 4,007; in this drawing the rally stalls at 4,005, just under it. On real charts, price often turns between levels, goes straight through them or stops at a level you did not draw.

Common mistakes

Drawing on a swing that is not finished, or on a tiny swing that nobody else would choose.
Buying every touch of 61.8% without a trigger or an invalidation level.
Moving the anchors until the levels fit what price already did. That makes the tool look accurate and teaches you nothing.

This lesson is educational. Fibonacci levels describe proportions of a past swing; they do not predict where price will turn.

🛠️ Practice task

Use a real chart. This is for practice, not for placing a trade.

Open gold (XAU/USD) on H4 in TradingView or MT5. You can check the live price on the Invvex gold page.
Find the last completed up-swing or down-swing and draw the Fibonacci retracement on its wicks.
Write down the 38.2%, 50% and 61.8% prices, and the price where the swing would be broken (100%).
Mark any old support or resistance level or trendline that sits near those levels.
Repeat on EUR/USD H4 and compare: where did the pullback actually end, and was it near a level that had a second reason?

🎯 Mark this chart

Study the drawing, pick the letter, then check. This exercise does not count toward your progress; the quiz below does.

EUR/USD H1: find the 61.8% retracement Illustrative chart: drawn data, not real prices.