What is fibonacci retracements and how to gain profit from it ?

### **What is Fibonacci Retracement?**

**Fibonacci Retracement** is a popular technical analysis tool that helps traders identify potential levels of support and resistance in a trending market. It is based on the Fibonacci sequence, a series of numbers where each number is the sum of the two preceding ones (e.g., 0, 1, 1, 2, 3, 5, 8, 13, etc.). The key ratios derived from this sequence — **23.6%, 38.2%, 50%, 61.8%, and 78.6%** — are used as potential levels at which an asset's price may retrace before continuing its trend.

In technical analysis, **Fibonacci retracements** are plotted by drawing a line between the **high** and **low** points of a recent price movement (either upward or downward). The horizontal lines are drawn at the key Fibonacci levels between those points. These levels act as potential zones where prices could reverse or find support/resistance.

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### **Key Fibonacci Retracement Levels:**

1. **23.6%** – The shallowest level of retracement, typically indicating a weak pullback.
2. **38.2%** – A moderate retracement that is often considered a strong level of support or resistance.
3. **50%** – Although not a Fibonacci number, this level is significant in technical analysis. A 50% retracement is a commonly observed level for potential reversal.
4. **61.8%** – The most important Fibonacci level, often referred to as the "golden ratio." This level is frequently seen as a strong support or resistance area.
5. **78.6%** – A deeper retracement level, signaling a significant correction or pullback.

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### **How to Use Fibonacci Retracements to Gain Profit?**

Fibonacci retracements help traders find entry points, set stop-loss levels, and define profit targets based on historical price movements. Here’s how you can apply Fibonacci retracements to gain profit:

#### **1. Identify the Trend:**
Before using Fibonacci retracement, it’s crucial to **identify the prevailing market trend** (uptrend or downtrend). Fibonacci retracements work best in trending markets, whether bullish or bearish.

- **In an Uptrend:** Identify the most recent **low** and **high** points. Fibonacci retracements are drawn from the low to the high, as the price is expected to retrace back down before continuing higher.

- **In a Downtrend:** Identify the most recent **high** and **low** points. Fibonacci retracements are drawn from the high to the low, as the price is expected to retrace upward before continuing lower.

#### **2. Draw Fibonacci Retracement Levels:**
- To apply Fibonacci retracement:
- In an **uptrend**, draw the Fibonacci retracement tool from the **lowest point** (start of the trend) to the **highest point** (end of the trend).
- In a **downtrend**, draw the Fibonacci retracement tool from the **highest point** (start of the trend) to the **lowest point** (end of the trend).

This will automatically plot horizontal lines at the key Fibonacci levels (23.6%, 38.2%, 50%, 61.8%, and 78.6%) on the chart.

#### **3. Watch for Price Reactions at Fibonacci Levels:**
Once you’ve plotted the Fibonacci retracement levels, watch how the price reacts as it approaches these levels:

- **Support in an Uptrend**: When the price pulls back to a Fibonacci retracement level, it may find **support** at one of these levels before bouncing back in the direction of the prevailing trend.
- **Resistance in a Downtrend**: In a downtrend, as the price retraces upward, it may encounter **resistance** at one of these levels before continuing lower.

#### **4. Enter the Trade:**
Once the price approaches a key Fibonacci level, look for signs of a **reversal**. This could be in the form of candlestick patterns (e.g., bullish engulfing or bearish engulfing), **divergence** with indicators (e.g., RSI or MACD), or other technical signals indicating the price is likely to reverse or continue in the direction of the trend.

- **In an Uptrend**: Look for the price to find support at a Fibonacci level (like 38.2%, 50%, or 61.8%) and begin to move higher. You could enter a **buy trade** when the price shows signs of reversal (e.g., bullish candlestick patterns).

- **In a Downtrend**: Look for the price to face resistance at a Fibonacci level and begin to move lower. You could enter a **sell trade** when signs of reversal (e.g., bearish candlestick patterns) appear.

#### **5. Set Stop Losses and Take Profits:**
Once you’ve entered a trade, it’s crucial to set **stop-loss orders** to protect your capital and **take-profit levels** to lock in gains.

- **Stop-Loss:** Place your stop-loss slightly below (for a buy) or above (for a sell) the Fibonacci level, depending on where the price retraced. If the price breaks through the Fibonacci level significantly, it could indicate that the trend is reversing, and you should exit the trade.

- **Take-Profit**: Use the next Fibonacci level as a potential **take-profit target**. For example, if you enter a buy trade after a pullback to the 50% level, you could set your target at the 23.6% level or the previous high.

#### **6. Combine with Other Indicators:**
Fibonacci retracement works best when combined with other technical analysis tools. Using multiple confirmation signals can increase the reliability of the trade setup:

- **RSI (Relative Strength Index)**: Use RSI to check for overbought or oversold conditions. For example, if the price pulls back to the 61.8% level, and RSI shows **oversold conditions**, this could confirm that the price may reverse upward.

- **MACD (Moving Average Convergence Divergence)**: Use MACD to confirm trend momentum. If the price approaches a Fibonacci level and you see a bullish or bearish MACD crossover, this can add confirmation to your trade.

- **Candlestick Patterns**: Watch for reversal candlestick patterns (e.g., bullish engulfing, hammer, shooting star) at key Fibonacci levels to strengthen your trade entry.

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### **Examples of Fibonacci Retracement in Action**

1. **Bullish Trend Example**:
- The price of a stock moves from $100 to $150 (a 50% gain).
- You draw Fibonacci retracement from $100 (low) to $150 (high).
- The key retracement levels will be 23.6% at $141.80, 38.2% at $138.90, 50% at $125, and 61.8% at $123.20.
- The price pulls back to the 50% level at $125 and starts to bounce back up, showing bullish candlestick patterns like a **hammer**.
- You enter a **buy** position at $126, place your stop-loss at $123, and target the previous high of $150 for profit.

2. **Bearish Trend Example**:
- The price of a stock moves from $200 to $150 (a 25% decline).
- You draw Fibonacci retracement from $200 (high) to $150 (low).
- The key retracement levels will be 23.6% at $157.80, 38.2% at $161.80, 50% at $175, and 61.8% at $178.40.
- The price retraces to the 38.2% level at $161.80 and begins to show bearish signals (e.g., **bearish engulfing candlestick**).
- You enter a **sell** position at $160, place your stop-loss at $164, and set a take-profit target at $150 (previous low).

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### **How to Maximize Profits Using Fibonacci Retracements**

1. **Trade with the Trend**: Fibonacci retracements work best in trending markets. Always identify the trend first and trade in the direction of that trend.

2. **Look for Confirmation**: Do not rely solely on Fibonacci levels. Always look for additional confirmation signals like candlestick patterns, volume, and oscillators (RSI, MACD) before entering a trade.

3. **Combine with Other Fibonacci Tools**: In addition to retracements, use **Fibonacci extensions** to project future price levels where the trend might continue after the retracement.

4. **Use Multiple Timeframes**: Check Fibonacci retracement levels on higher timeframes (e.g., daily or weekly) to identify stronger, more reliable support/resistance levels.

5. **Monitor Volume**: A price movement toward a Fibonacci level with high volume often indicates a more reliable support or resistance level.

### **Conclusion:**
Fibonacci retracement is a powerful tool that can help traders identify potential reversal levels in trending markets. By combining Fibonacci retracement levels with other technical analysis tools and proper risk management, you can increase the probability of successful trades and potentially profit from market corrections or continuations.