Fibonacci Retracement
Fibonacci Retracement is a technical analysis tool used in financial markets to identify potential levels of support and resistance. Derived from the Fibonacci sequence, it involves drawing horizontal lines on a price chart at key Fibonacci levels, such as 23.6%, 38.2%, 50%, 61.8%, and 78.6%. These levels are believed to represent areas where an asset's price may experience a reversal or continuation of a trend.
Fibonacci Retracement is a technical analysis tool used in financial markets to identify potential levels of support and resistance for an asset's price movement. Named after the famous Italian mathematician Leonardo Fibonacci, who introduced the Fibonacci sequence to the Western world in the 13th century, this tool is based on a series of numbers where each number is the sum of the two preceding ones (0, 1, 1, 2, 3, 5, 8, 13, 21, 34, and so on).
The Fibonacci Retracement tool involves drawing horizontal lines on a price chart at key Fibonacci levels: 23.6%, 38.2%, 50%, 61.8%, and 100%. These levels are derived from ratios within the Fibonacci sequence and are believed to represent potential areas where an asset's price might experience a reversal or a significant change in trend.
The primary concept behind Fibonacci Retracement is the idea that after an impulsive price movement (either up or down), the price tends to retrace or pull back before continuing in the original direction. Traders and analysts use Fibonacci Retracement levels to identify potential entry and exit points in the market.
The key Fibonacci levels have specific significance:
- 23.6% Retracement Level: This level is often considered the shallowest retracement and is used to identify potential areas of minor support or resistance.
- 38.2% Retracement Level: This level is commonly associated with a moderate retracement. Traders often look for potential reversals or bounces in the price at this level.
- 50% Retracement Level: While not a Fibonacci number, the 50% level is included as a psychological level. Traders watch for potential trend reversals or consolidation around this point.
- 61.8% Retracement Level: Known as the "Golden Ratio," this level is considered a strong retracement level. Traders often look for potential trend reversals or significant support and resistance at this level.
- 100% Retracement Level: This level represents a complete retracement of the prior move. If the price reaches this level, it suggests that the entire previous trend has been undone.
Fibonacci Retracement is widely used in various financial markets, including stocks, currencies, commodities, and cryptocurrencies. Traders and analysts use this tool in conjunction with other technical analysis methods to make informed decisions about market entry, exit, and trend reversal points. While it is not foolproof, Fibonacci Retracement remains a valuable tool for technical analysts seeking to identify potential price levels where the market might exhibit significant price action.