Fibonacci Retracement
Fibonacci Retracement is a technical analysis tool used to identify potential levels of support and resistance in financial markets. It is based on the Fibonacci sequence, where each number is the sum of the two preceding ones, and the key ratios derived from this sequence are used to predict the retracement levels of an Asset’s price movement.
The primary Fibonacci retracement levels are:
- 23.6%
- 38.2%
- 50%
- 61.8%
- 100%
Traders use these levels to anticipate potential reversal points in price trends. For example, if a Stock rises from $100 to $150, a trader may use Fibonacci retracement to identify potential support levels at $138.20 (38.2% retracement) and $130 (61.8% retracement) as the price retraces before continuing its upward trend.
In cases where a Stock is in a downtrend, Fibonacci retracement levels can help identify resistance levels where the price may struggle to move higher. For instance, if a Stock declines from $200 to $100, retracement levels at $161.80 (61.8% retracement) may indicate a potential resistance level where the Stock could reverse direction and continue downward.