Fibonacci Retracement
Candlefocus EditorThe idea behind the Fibonacci Retracement is based on the sequence of numbers identified by Italian mathematician, Leonardo Fibonacci in the 13th century. The Fibonacci sequence is derived using a simple mathematic equation: the sum of two numbers will equal the next number in the sequence (0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, and so on). The ratios of any two numbers in this sequence are significant and form the basis of all Fibonacci Retracement levels. The most commonly used ratios derived from this sequence are 23.6%, 38.2%, 50%, 61.8%, and 78.6%.
Fibonacci Retracement levels are determined by first connecting any two extreme points on a chart. The high and low points could represent an area of resistance or support and can then be used to help identify areas of possible support or resistance in the future. After the high and low points are connected on a chart, the Fibonacci Retracement ratios are used to determine areas of support where corrections might occur in the original trend. The goal of using the Fibonacci Retracement Ratios is to inform a trader of potential areas where the price of an asset could reverse or stall.
However, it is important to note that these ratios should not be relied on exclusively, as all markets are unique and do not always move in predictable trends. Therefore, it is dangerous for to assume that the price of a security will reverse or stall after hitting a specific Fibonacci level. Instead, Fibonacci Retracement Ratios should be used in conjunction with other technical analysis tools, such as support and resistance levels and chart patterns. By combining different technical analysis tools, traders can gain a better understanding of the direction of a security’s price and make more informed decisions when entering and exiting a position.