18 June 2020
Traders and investors need to have different tools, techniques, and methods. This way, they can analyze the market successfully. Knowing these techniques help them to gain profit instead of losing it. The Fibonacci retracement is one such method.
In this article, we will provide you with enough information so that you can understand and utilize the Fibonacci Retracement to your advantage.
Fibonacci Retracement 101
Fibonacci retracements are one of the most used trading tools. This is because they are relatively simple to use. They can also be applied to almost any trading instrument.
Fibonacci ratios can even act as a primary mechanism in a countertrend trading strategy.
Fibonacci retracement levels are well known for their horizontal lines, which show the possible locations of support and resistance levels. Each level is associated with one of the above ratios or percentages. Moreover, it shows how much of a prior move, the price has retraced. You can use it to determine if the previous trend is likely to continue.
How to Calculate the Fibonacci Retracement
For technical analysis, we took the two most extreme points to identify the Fibonacci retracement ratios. All this must be done on a chart. Then, we divide the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8%, and 100%.
Furthermore, we draw horizontal lines on each of these levels. That way, we can use them to identify possible support and resistance levels.
How do Fibonacci Ratios Work?
Fibonacci’s numerical sequence is one of the most exceptional tools out there. Each number of the sequence is approximately 1.618 times greater than the preceding number. This common relationship between every number in the series is the foundation. And as we mentioned, we use them to determine retracement levels.
38.2% and 61.8%: how to calculate them
Also, we mentioned these are the two most popular Fibonacci retracement ratios. Here is how to calculate them. First, we find the Fibonacci ratio of 61.8% by dividing one number in the series by the number that comes next to it. For example, 21 divided by 34 equals 0.6176, and 55 divided by 89 equals about 0.61798.
Second, the 38.2% ratio is found by dividing a number in the series by the number located two spots to the right. For instance, 55 divided by 144 equals approximately 0.38194.
Pros and Cons
Using this tool is entirely subjective. Thus, traders who make profits will tell you that this tool is practical. But traders who lost money are going to tell you that it is unreliable. For that reason, we recommend you to be aware of the pros and cons of these tools.
Nonetheless, having a Fibonacci retracement strategy can be helpful. You might be able to identify possible corrections, reversals, and countertrend bounces.
In summary, Fibonacci retracements help you identify corrections and possible countertrend bounces. It is one of the most widely used trading tools because of its simplicity and variety in application. If Fibonacci retracements are used correctly, they can be one of the best tools for traders.