What is Fibonacci retracement?

If you have been in the market for some time, you may have heard of “Fibonacci retracements”. Today we are going to share an informative write-up along with a few exhibits that may help you solidify your understanding of this concept.

Table of Contents:

1. What are Fibonacci levels?
2. What is the significance of retracement levels?
3. How to find retracement levels?
4. How to use the retracement levels?

Without further ado, let’s jump in!

What are Fibonacci Retracement levels?

  • The retracement levels are horizontal lines that indicate areas where the price could stall or reverse.
  • These horizontal levels can act as potential support or resistance levels.
  • They are based on Fibonacci numbers. Each level is associated with a percentage which means how much of a prior move the price has retraced.
  • The retracement levels are 23.6%, 38.2%, 61.8%, and 78.6%.
  • While 50% is not a pure Fibonacci ratio, it is still used as a support and resistance. This is because people regard it as an important level.
  • The price won’t always bounce from these levels. They should be looked at as areas of interest. Hence, the Fibonacci retracement should be used as a confirmation tool.

Significance of Fibonacci Retracement levels
Different traders use this tool differently but the most common usage is as follows:
  • Place entry orders
  • Determine stop-loss levels
  • Set price targets
For example,A stock may be in an uptrend. After a move up, it retraces to the 61.8% level. Then, it starts to go up again. Since the bounce occurred at a retracement level during an uptrend, long positions can be initiated with an optimal stop loss.

Finding Fibonacci Retracement levels
In order to find the retracement levels, you have to identify the recent significant swing high and swing low and then plot the Fibonacci accordingly.

For uptrend: First, select the swing low and then the swing high.

For downtrend: First, select the swing high and then the swing low.

Exhibit: Fibonacci retracement in an uptrend

Exhibit: Fibonacci retracement in a downtrend

How to use the retracement levels?
If the price is approaching a Fibonacci level, you should look out for the following things at the point of interaction or in the vicinity of the level.

  • Reversal candlestick patterns
  • Rising volumes
  • Moving average
  • RSI divergence
  • Previous support/resistance level

Adding Fibonacci analysis with other common methods of technical analysis can be useful for adding confluence to a trade.

Thanks for reading! Hope this was helpful!

See you all next week. 🙂
– Team TradingView

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