Trend Analysis: Fibonacci Retracement
Price correction (retracement) is a short-term anti-trend price movement. Prices almost never just rise during the uptrend and fall during the downtrend. Even within the same trend, the price can rise and then retrace for a while or vice versa. The most profitable and less risky positions are positions opened at the end of the retracement. It is therefore important to know how to define the levels at which the trend will resume after a short retracement. Technical analysis has the so called correction index which uses Fibonacci numbers. The Fibonacci sequence is a series of numbers that takes the previous number and adds it to the current number to get the next number in the sequence. For example, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 etc.
These numbers possess an intriguing number of interrelationships, such as the fact that any given number is approximately 1.618 times the preceding number and any given number is approximately 0.618 times the following number.
Experienced traders know that in a fast market, the correction is about 0.382 of the price range movement. In a market with average price movements, correction is about half the price range movement. Maximum correction is 0.618, which indicates that the trend is rather weak.
Fibonacci Retracement in MetaTrader 4
To estimate if Fibonacci Retracement breakout is true, please refer to the methods used to estimate the truth of the trend lines breakouts.
In order to draw Fibonacci Retracement in MetaTrader 4 press the 
button of the "Line Studies" toolbar:
Drag the cursor to the uptrend low (downtrend high), click and hold the left mouse button to drag the cursor to the uptrend high (downtrend low) and release the button. Fibonacci Retracement appears on the chart. Highlight it by double clicking, click the right mouse button to enable the context menu with the settings.
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