🔹Fibonacci Retracement
Last updated
Last updated
The famous Fibonacci sequence is a sequence of numbers such that each number sequence is calculated by adding the two previous numbers, starting with 0 and 1. The Fibonacci sequence goes:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144,…
The Fibonacci Sequence provides Fibonacci retracement, a widely known tool in the chart analysis of financial markets. Fibonacci retracement is a process which uses ratios found in the Fibonacci sequence to predict market behaviour. The Fibonacci retracement of 61.8% is based on Fibonacci sequence golden ratio.
The most important ratio found through Fibonacci retracement is 0.618 (sometimes known as the golden ratio). It is calculated by dividing a number by the number immediately following it, excluding the first six numbers. Another ratio is 0.382, which is found by dividing a number by the second following number. For instance, 34/89=.382.
Often, retracements (or reversals) happen in markets. A stock or currency will go against its general trend, before once again following it. The Fibonacci retracement levels are used for planning entries at retracement levels to trade the next impulse of the trend.
Fibonacci Retracement
Fibonacci retracement levels are horizontal lines that indicate the possible support and resistance levels where the price could potentially reverse direction. These lines are based on the Fibonacci sequence and the golden ratio.
The idea is to go long (or buy) on a retracement at a Fibonacci support level when the market is trending UP. And to go short (or sell) on a retracement at a Fibonacci resistance level when the market is trending DOWN.
The theory is that after the price begins a new trend direction, the price will retrace or return partway back to a previous price level before resuming in the direction of its trend.
The retracement levels are 38%, 50%, 61% and 78%
How to use Fibonacci Retracement
Plot the fib of the first impulse when you are planning to trade the 2nd impulse (wave 3 or wave 5) after the correction/retracement.
In an up impulsive wave, if the correction goes below the low of the first impulsive wave, the fib will no longer be valid and should be removed as there is a change of structure, and vice versa for a down impulsive wave.
