What is Fibonacci Retracement?
Fibonacci retracement is a popular method in technical analysis that uses ratios to determine support and resistance levels. These ratios are derived from the Fibonacci sequence, which consists of key numbers identified by mathematician Leonardo Fibonacci. Fibonacci retracement is based on the idea that markets will retrace a portion of its original move in price before continuing its original trend. Whether they are trading stocks, commodities or even day trading the forex market, the Fibonacci retracements pattern can be useful to swing traders in identifying potential reversal levels and setting price targets and stop losses.
Popular Fibonacci Ratios
There are many different Fibonacci ratios that technical analysts use to determine retracement levels. However, the popular Fibonacci ratios are 0%, 23.6%, 38.2%, 50%, 61.8% and 100%. Technical analysts use Fibonacci ratios to identify retracement levels and predict the extent of a correction or pullback.
How do we come up with these ratios? First, it helps to have some knowledge on the Fibonacci Sequence. It is unnecessary to examine the mathematical properties behind the sequence but we will cover the basics as to how the ratios are derived. Continue reading