Fibonacci Retracement in the Stock Market: A Practical Guide to Identifying Entry and Exit Points

In modern technical analysis, few tools are as effective as Fibonacci retracement for identifying key bounce levels in prices. Whether trading in any market—currencies, stocks, indices, or cryptocurrencies—this tool allows us to anticipate how far a move might correct before the main trend continues.

Why does Fibonacci retracement work in the stock market?

Markets never move in a straight line. After each significant impulse, prices retrace before resuming their original direction. This is where the golden ratio (1.618) comes into play, a number that appears constantly in nature and that traders have adapted to predict these corrective movements.

The origin of this series dates back to Italian mathematician Leonardo Pisano, who in his work “Liber Abaci” popularized a sequence where each number is the sum of the two preceding ones: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144. From these numbers emerged the retracement percentages used by millions of traders today: 23.6%, 38.2%, 50%, 61.8%, and 76.4%.

Key levels and their practical interpretation

Each Fibonacci retracement level acts as a zone where the price is likely to find support or resistance. The difference between a superficial bounce at 23.6% and a deep one at 61.8% is crucial: deeper bounces tend to take longer to consolidate but generate significantly higher returns.

When a trader correctly draws Fibonacci (always from left to right, using the most recent high and low), they get a “roadmap” of the probable price behavior. For example, if the market bounces at the 61.8% line, there is a statistical probability it will continue toward the previous level before reversing its direction.

Application in real trades: EUR/USD on different timeframes

Let’s take a specific case. On the daily chart of EUR/USD, we observe a clear downtrend with a high at 1.09414 and a subsequent low at 1.03489. When the price begins to recover, we draw Fibonacci vertically between these two points.

Incorporating a 50-period exponential moving average as a secondary confluence, we identify that this line converges near the 61.8% retracement level. This is the signal we were waiting for: we place a sell entry at 1.07139, set the stop loss at the previous high (1.09414), risking 228 pips(, and use Fibonacci extensions to determine the profit target at 1.01810 )targeting 532 pips(.

The result: closed the trade at TP on July 5 with a profit of 532 pips, risking only 228. With a 0.01 lot, this equals a net gain of $53.2 USD.

Now, if we want to trade on smaller timeframes )intraday trading(, the same EUR/USD on a 1-hour chart offers additional opportunities. In this specific case, on June 17, the short-term market showed an upward correction where the 1-hour Fibonacci retracement suggested a buy at the 61.8% level )1.04651(.

However, simultaneously, the daily Fibonacci indicated that any upward move should halt before the 61.8% daily level )1.06157(. Combining both signals—trading long-term but referencing short-term—, we place a cautious buy with a stop loss at 1.04250 )40 pips risk( and take profit at 1.06011 )targeting 135 pips.

Result: closed at TP on June 22 with a profit of 135 pips, risking 40. With a 0.05 lot, we gained $62.5 USD net.

Drawing technique: the fundamental step

Drawing Fibonacci retracement always follows the same rule: from left to right, identifying the most recent high and low of the trend. It doesn’t matter if we trade stocks, Forex, or cryptocurrencies; the mechanics are identical.

A common debate among traders is whether to consider the full wick of the candle or only the body. Both approaches work; consistency is more important than absolute precision. With practice on a demo account, you’ll develop intuition about which extremes to include.

Limitations and the need for confluences

Although Fibonacci retracement is powerful, using it in isolation does not guarantee consistent results. This is the critical point: Fibonacci should work together with other indicators. Moving averages, previous support/resistance levels, fundamental analysis, and news can converge to amplify the probability of success.

Timeframes also matter decisively. A retracement on a weekly chart is more reliable than one on a 5-minute chart. As you gain experience, you’ll discover that certain Fibonacci levels are more robust than others, and you might incorporate additional custom percentages based on your historical results.

Conclusion: a versatile tool but not infallible

Fibonacci retracement in stocks and other markets is a reliable compass when applied correctly. Define your entry points in confluence zones, set stops below the deepest Fibonacci level, and target previous levels or Fibonacci extensions for profits. The key lies in patience, practice, and integration with other technical analysis tools.