Fibonacci Retracement

Fibonacci Retracement

Fibonacci retracement is a tool used to measure potential zones where price might temporarily pause after a previous trend before resuming the original direction. This tool applies specific fibonacci levels that suggest where price may pull back before continuing its initial trend.

The fib retracement levels are derived from these numerical ratios:

- 23.6% (a key retracement level)

- 38.2%

- 50.0% (not a Fibonacci number but commonly used as a critical level)

- 61.8% (golden ratio, often considered the most significant retracement level)

- 100% (full retracement)

How does Fibonacci retracement work on a chart?

On a chart, Fibonacci retracement appears as horizontal lines showing  levels where price might react. These levels highlight how far price may pull back after an initial movement and where it might regain thrust to the original direction.

 

1.To apply the tool:

·        You must identify and connect the Fibonacci tool from the start to the end of a major price movement (e.g., in an upward trend).

·        You connect point A (lower point) to point B (higher point) and automatically get retracement levels (23.6%, 38.2%, 50%, 61.8%).

 

2.Utilising retracement levels:

·        If price goes down during a correction, it may pause at one of these Fibonacci levels before reversing back into the original trend.

·        The 61.8% level is seen as the most critical because of its link to the golden ratio. If price corrects to this level and starts rising again, it indicates the trend may continue.

Por exemplo:

·        Imagine a currency price on forex rising from 1.1000 to 1.2000. Using Fibonacci retracement from 1.1000 to 1.2000 helps pinpoint potential correction levels.

·        If price begins to decline, it may halt at 23.6% (1.1880), 38.2% (1.1760), 50% (1.1500), or 61.8% (1.1320).

·        Finding support at one of these levels may prompt the price to reverse and continue its upward path.