What Is Fibonacci Retracement In Trading?

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A Fibonacci retracement is a popular tool that traders can use to identify support and resistance levels, and place stop-loss orders or target prices. It is based on the key numbers identified by mathematician Leonardo Fibonacci in the 13th century.

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In technical analysis, a Fibonacci retracement is created by taking two extreme points (usually a major peak and trough) on a stock chart and dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8%, and 100%. Once these levels are identified, horizontal lines are drawn and used to identify possible support and resistance levels. How the Fibonacci Sequence Works?… The Fibonacci sequence of numbers is as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc. Each term in this sequence is simply the sum of the two preceding terms, and the sequence continues infinitely.

One of the remarkable characteristics of this numerical sequence is that each number is approximately 1.618 times greater than the preceding number. This common relationship between every number in the series is the foundation of the common ratios used in retracement studies.

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The key Fibonacci ratio of 61.8% is found by dividing one number in the series by the number that follows it. For example, 21 divided by 34 equals 0.6176 and 55 divided by 89 equals 0.6179.

The 38.2% ratio is found by dividing one number in the series by the number that is found two places to the right. For example, 55 divided by 144 equals 0.3819.

The 23.6% ratio is found by dividing one number in the series by the number that is three places to the right. For example, 8 divided by 34 equals 0.2352. >>> FIBONACCI INDICATOR <<<

A Fibonacci retracement is created by taking two extreme points on a stock chart and dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8%, and 100%.

For reasons that are unclear, these Fibonacci ratios seem to play an important role in the stock market, just as they do in nature, and can be used to determine critical points that cause an asset’s price to reverse.

Fibonacci retracements are the most widely used of all the Fibonacci trading tools. This is partially due to their relative simplicity and partially due to their applicability to almost any trading instrument. They can be used to identify and confirm support and resistance levels, place stop-loss orders or target prices, and even act as a primary mechanism in a countertrend trading strategy.

Fibonacci trading tools suffer from the same problems as other universal trading strategies, such as the Elliott Wave theory.

That said, many traders find uses for Fibonacci retracements and have found success using them to place transactions within greater price trends. Fibonacci retracement can become even more powerful when used in conjunction with other indicators or technical signals.

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