Fibonacci Retracement : Old but Gold Rules

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The Fibonacci sequence and its related ratios are popular tools in chart analysis, primarily used in trading and financial analysis. Fibonacci levels can help traders identify possible support and resistance levels, retracement zones, and potential price targets. Here’s a step-by-step explanation:

1. Understanding Fibonacci Sequence and Ratios

• The Fibonacci sequence starts with 0 and 1, and each subsequent number is the sum of the previous two numbers: 0, 1, 1, 2, 3, 5, 8, 13, 21, etc.
• From this sequence, Fibonacci ratios are derived. Common ratios include 61.8% (the “golden ratio”), 38.2%, and 23.6%. These ratios are used to determine levels of potential support and resistance.

2. Fibonacci Retracement Levels

• Retracement refers to the temporary reversal in a stock’s price during an overall trend. Fibonacci retracement levels are calculated as percentages of the price range and plotted on a chart to help identify levels where prices might reverse.
• Key levels typically include: 23.6%, 38.2%, 50%, 61.8%, and sometimes 78.6%.

3. Drawing Fibonacci Levels on a Chart

• To draw Fibonacci levels on a price chart, you identify two significant points (a high and a low) on a price movement:
  1. Uptrend: Select the lowest point and drag to the highest point.
  2. Downtrend: Select the highest point and drag to the lowest point.
• The resulting levels show potential areas of support (for an uptrend) or resistance (for a downtrend) where price may pause or reverse.

4. Example of Fibonacci Retracement on a Chart

Suppose a stock is trending upward and reaches a high of $100 after starting from a low of $60:

• Draw a line from $60 (low) to $100 (high).
• Calculate retracement levels based on this range ($100 - $60 = $40):
  • 23.6% retracement: $100 - (40 * 0.236) = $90.56
  • 38.2% retracement: $100 - (40 * 0.382) = $84.72
  • 50% retracement: $100 - (40 * 0.5) = $80
  • 61.8% retracement: $100 - (40 * 0.618) = $75.28

These levels provide potential support areas as the price retraces from the high.

Here's a visual example of Fibonacci retracement levels on a financial chart. The image illustrates an upward price trend from $60 to $100 with Fibonacci retracement levels, marking potential support zones if the price pulls back. Each level is labeled, showing where traders might anticipate reversals or consolidations based on Fibonacci ratios.

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