If you are an active trader or an individual who is working in the stock market for a couple of years you would have noticed that the price of an underlying asset follows a certain pattern. In today’s article we are going to discuss about fibonacci retracement
The pattern that I am talking about is the impulse and correction pattern or some people also call this pattern a zig-zag pattern but for those who don’t know what is an impulse and correction move then in simpler terms, the move that is in favor of the trend is called an impulse move. The counter trend moves that are against the major trend or occur between impulse moves is called a correction.
In order to calculate this correction move a trader uses a technical tool called Fibonacci Retracement.
What is Fibonacci Retracement?
Fibonacci retracement is a technical analysis tool that traders use to identify possible support and resistance levels on a chart. Support and resistance are areas where the price tends to bounce back or reverse after a significant move. Traders use these levels to enter and exit the market in the direction of the initial trend.
The retracement levels represent the percentage of the original move that the price has retraced or corrected.
History Of Fibonacci Retracement.
The sequence was discovered by Leonardo Pisano Bogollo, an Italian mathematician from Pisa, who was also known as Fibonacci. He introduced the sequence to the Western world in his book Liber Abaci in the 13th century. However, some sources claim that the sequence was already known in ancient India as early as 450 BC.
How to Draw Fibonacci Retracement?
In order to draw fibonacci retracement in a bullish market, a trader has to connect the swing low to swing high. Once you connect the swing low to swing high you would the fibonacci levels like .7955 (23.6%), .7764 (38.2%), .7609 (50.0%), .7454 (61.8%), and .7263 (76.4%).
Once these levels are plotted on your chart these levels will act as a support to the price.
Similarly, in a downtrend or a bearish market, a trader has to connect a swing high to swing low. Once you have connected the swing highs and the swing lows then you will the same levels of fibonacci .7955 (23.6%), .7764 (38.2%), .7609 (50.0%), .7454 (61.8%), and .7263 (76.4%) but this time these levels will act as a resistance to the price.
Whenever the price approaches these retracement levels then you will see that price will face some resistance/support at these levels.
Note- 50.0% level of the fibonacci retracement is not a fibonacci ratio but many traders use this level and a lot of times this level works.
(38.2%), .7609 (50.0%), .7454 (61.8%) are also known as golden zones or golden ratios since the price usually reverses from these levels. In case of breakouts of these levels there is a possibility that the trend of the price has changed.
How are Fibonacci Levels Calculated?
Fibonacci retracement levels are calculated by using the Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8%, and 78.6%. These ratios are derived from the Fibonacci sequence, which is a series of numbers that starts with 0 and 1, and each subsequent number is the sum of the previous two numbers. For example, 0, 1, 1, 2, 3, 5, 8, 13, 21, and so on.
Conclusion
In the end I would conclude this article by saying that Fibonacci Retracement is an amazing tool to calculate the retracements that are done in the market and to enter into trades in the favor of the major trend. Using Fibonacci Retracement a trader can identify support and resistance in the market and can take the benefit of impulse moves but in order to make money from using Fibonacci Retracement you need to spend time reading charts and you need to draw and connect valid swing lows and swing highs.