The Series of Technical Analysis Tools Chapter 2: “Fibonacci Retracement”

What is a Fibonacci Retracement?

Fibonacci retracement is a tool that helps user (Trader/Investor) to find the areas of support and resistance of the stock’s price. It is also used to find the Target & Stop loss of the stocks.

It plots percentage retracement lines based upon mathematical relationship within Fibonacci sequence. This retracement levels provide support & resistance levels that can be used to target price objects.
How does it work?
Fibonacci Retracements are generated by drawing a trend line between two extreme points i.e. the start of a trend and the End of a trend. Then this tool generates six horizontal lines intersecting the trend line at the Fibonacci levels of 0.0%, 23.6%, 38.2%, 50%, 61.8%, and 100%.
Fibonacci retracement levels are static prices that do not change, unlike moving averages. This allows traders and investors to anticipate and react prudently when the price levels are tested. These levels are inflection points where some type of price action is expected, either a rejection or a break.
Key points to remember:
  • The golden levels of Fibonacci retracements are 0.0%, 23.6%, 38.2%, 50%, 61.8%, and 100%.
  • To manually draw a Fibonacci Retracement, you have to draw a straight line that connects two points Start of the Trend and End of the Trend.
  • Fibonacci can provide reliable trade setups, but not without confirmation. Applying additional technical tools like MACD or stochastic oscillators will support the trade opportunity and increase the likelihood of a good trade.

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