Understanding and Profitably Using Fibonacci Retracement in Technical Analysis

by: Ivan Cavric

Fibonacci retracement is a popular technical analysis tool that uses horizontal lines to indicate areas of support or resistance at the key Fibonacci levels before the price continues in the original direction. These levels are derived from the Fibonacci sequence and are commonly used in conjunction with trend lines to find entry and exit points in the market.

The Fibonacci sequence is a series of numbers in which each number is the sum of the two preceding numbers, starting with 0 and 1. The key Fibonacci levels derived from this sequence are 23.6%, 38.2%, 50%, 61.8%, and 100%.

To use Fibonacci retracement, you need to first identify the direction of the trend. This can be done using trend lines, moving averages, or other technical indicators. Once you have identified the trend, you can then draw a Fibonacci retracement from the high to the low of the trend. The horizontal lines at the key Fibonacci levels will then act as potential areas of support or resistance.

For example, if you are looking at an uptrend, you can draw the Fibonacci retracement from the high to the low of the trend. If the price then reaches a key Fibonacci level, such as 61.8%, and begins to bounce back up, it could be a good entry point to buy. On the other hand, if the price reaches a key Fibonacci level and begins to reverse down, it could be a good exit point to sell.

Fibonacci retracement can also be used in conjunction with other technical indicators, such as the Relative Strength Index (RSI) or the Moving Average Convergence Divergence (MACD), to confirm potential entry and exit points.

It is important to note that Fibonacci retracement is not a standalone trading system and should not be relied upon solely for making investment decisions. It is a tool that can be used in conjunction with other technical and fundamental analysis to make informed trading decisions.

In conclusion, Fibonacci retracement is a useful technical analysis tool that uses horizontal lines at key Fibonacci levels to indicate potential areas of support and resistance. It can be used to find entry and exit points in the market, but should not be relied upon solely for making investment decisions. By using Fibonacci retracement in conjunction with other technical and fundamental analysis, traders can make more informed trading decisions and potentially increase their profits.

Location: Welland, ON, Canada

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