Fibonacci retracement is a charting tool that helps traders estimate how far a price might pull back during a trend before the trend continues. It draws horizontal lines at fixed percentages of a move. This guide explains the levels, how to draw them, and how to use them on Pakistan Stock Exchange (PSX) charts.
What is a retracement?
Prices rarely move in a straight line. In an uptrend, a share rises, pulls back part of the way (a retracement), then rises again. Fibonacci retracement tries to answer: how deep might that pullback go?
The main Fibonacci levels
- 23.6%: a shallow pullback, common in very strong trends
- 38.2%: a moderate pullback
- 50%: not a true Fibonacci ratio, but widely watched
- 61.8%: often called the “golden ratio” level, and one of the most watched
- 78.6%: a deep pullback; if broken, the trend may be failing
How to draw it
- Find a clear move: in an uptrend, from a swing low to a swing high.
- Select the Fibonacci retracement tool on your charting platform.
- Click the swing low, then drag to the swing high. (In a downtrend, draw from the swing high to the swing low.)
- The platform draws the levels between the two points automatically.
Example: a share rises from Rs 100 to Rs 150, a move of Rs 50. The 38.2% retracement is about Rs 130.90, the 50% level is Rs 125, and the 61.8% level is about Rs 119.10.
How traders use the levels
- Looking for entries: watching for the price to slow down or form a bullish candlestick pattern near 38.2%, 50% or 61.8%.
- Confluence: a Fibonacci level is stronger when it lines up with a previous support level, a trendline or a moving average.
- Placing a stop loss: just beyond the next level, or below the swing low if the trend view would be invalidated.
Limitations
- Different traders choose different swing points, so their levels differ.
- Prices do not respect every level. Treat them as zones to watch, not guarantees.
- Fibonacci works best in clear trends, not in sideways markets.
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This article is for education only and is not investment advice. Trading shares involves risk, including the loss of capital.