Description
Fibonacci Retracement is a technical analysis tool based on the Fibonacci sequence, a set of numbers identified by Italian mathematician Leonardo Fibonacci in the 13th century. The Fibonacci sequence is a pattern of numbers that starts with the number one and then increases by adding the two previous numbers together. For example, the sequence begins with 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, and so on. Fibonacci Retracement is a way to identify potential levels of support or resistance in a given market. It is based on the idea that these levels can be used as a way to identify possible entry and exit points on a chart.
The Retracement is based on the concept of Fibonacci numbers, which are a sequence of numbers in which each number is the sum of the two preceding numbers. This sequence can be extended indefinitely. To use Fibonacci Retracement, traders must first identify a major high and low on a price chart. They then calculate the Fibonacci Retracement levels by dividing the vertical distance between the high and low by the Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8%, and 100%.
Once the Fibonacci levels have been calculated, traders can use them to identify potential areas of support and resistance. For example, if a trader identifies a major high and low on a chart, they can use the 23.6% Fibonacci Retracement level as a potential area of support. If the price of the asset falls to this level and then rises again, it could indicate that the trend is likely to continue in the direction of the original trend. Similarly, if the price of the asset rises to the 61.8% Fibonacci Retracement level and then falls again, it could indicate that the trend is likely to reverse.
Fibonacci Retracement can be used on any type of chart, but is most commonly used on candlestick charts. This is because the Fibonacci Retracement levels are most easily identified on a candlestick chart, as the lines of support and resistance are clearly visible.
The Retracement levels can be useful for traders who are looking to enter or exit the market at the right time. By identifying the levels of support and resistance, traders can determine when the market is likely to move in a certain direction, and then make an informed decision about whether to enter or exit the market.
Fibonacci Retracement can also be used to identify potential targets for an entry or exit. By calculating the Fibonacci levels, traders can identify possible price levels at which they can enter or exit the market. For example, if a trader identifies a major high and low on a chart, they can use the 23.6% Fibonacci Retracement level as a potential target for an entry. If the price of the asset falls to this level and then rises again, the trader can enter the market in the direction of the original trend.
The Fibonacci Retracement can be a useful tool for traders who are looking to make the most of their trading opportunities. By identifying potential levels of support and resistance, traders can make more informed decisions about when to enter and exit the market. However, it is important to remember that Fibonacci Retracement is not a perfect tool, and that it should be used in conjunction with other forms of technical analysis.