Fibonacci Retracement

Fibonacci Retracement

Fibonacci Retracement

Fibonacci retracement is a method used to identify possible support and resistance levels for a specific trading instrument. It is very popular among technical traders and is based on the numbers identified by Leonardo Fibonacci, a mathematician who lived in the thirteenth century. The basic presumption is that the market tends to react in predictable portions of a larger move, and Fibonacci retracement follows a series of continuation patterns. In this article we will say something on the most common patterns, on their importance in analysis and on their use in trading, so don’t go away!

Fibonacci Retracement | Why is it so important?

Although most price movements are random, there are also some natural reactions against a large price movement. The degree of the retracement can be estimated based on the vertical length of a security’s support and resistance levels. Traders who rely on Fibonacci retracement use Fibonacci ratios to place target prices or stop losses.

The 61.8% ratio (that is, the golden ratio) is calculated by dividing any Fibonacci number by the next number in the Fibonacci sequence. The second one is the 28.2% Fibonacci ratio. It is actually the inverse of the 61.8% ratio, calculated by dividing any number in the Fibonacci sequence by the second number following it. The third Fibonacci retracement level is the 23.6% level, but it’s not used that often. The 50% retracement level is often included when traders note Fibonacci levels on chart, but it’s not an actual part of the Fibonacci numbers sequence. Stay with us because in the next paragraph we will explain how Fibonacci retracement can actually be used.

Fibonacci Retracement | Use it wisely

It’s very usual that traders apply Fibonacci retracement levels after a substantial market move takes place. It can be both up or down. Traders plot on their charts various Fibonacci retracement levels, calculating the retracement from the top of an up move down back toward the low from which the uptrend began. If there’s a downtrend going on, you will calculate from the bottom of a move down back toward the high price from which the downtrend started. Then you should watch the retracement levels as potential price levels where the market may reverse and resume its overall trend.

This method is more reliable if they coincide with other support or resistance levels, such as a daily pivot point. To get more accurate predictions of the market movements you can combine it with other technical indicators, such as Engulfing Patterns or Flag Chart Pattern.

Fibonacci Retracement | Conclusion

Fibonacci retracement is one of the most important methods in market analysis, as it uses key Fibonacci ratios to predict market movements. You can also use it in combination with other methods in your analysis – that way you will get more accurate results and you will have better chances of ending in the money. We sincerely advise you to put a little effort in understanding the way Fibonacci retracement works: it won’t take you a lot of time, but it will surely help you a lot!

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FURTHER READING:

1. One Good Trade: Inside The Highly Competitive World Of Proprietary Trading (M. Bellafiore, 2010)
2. Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (N. Taleb, 2005)
3. Speculation spreads and the market pricing of proposed acquisitions  (Jan Jindraa , Ralph A. Walkling-2004)
4. Market Wizards (J. D. Schwager, 1989)
5. Step By Step Trading (A. Elder, 2015)

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Author: Ben Prescott
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