Definition
In finance, Fibonacci retracement is a method of technical analysis for determining support and resistance levels. They are named after their use of the Fibonacci sequence. Fibonacci retracement is based on the idea that markets will retrace a predictable portion of a move, after which they will continue to move in the original direction.
Fibonacci Retracement
Fibonacci Retracement is a term that is used in technical analysis, which talks about the areas of support and resistance. It is the retracement of an assets original move in price. The term makes use of horizontal lines in order to mark the areas of resistance, and support at the Fibonacci level, right before it continues in the original direction. The levels are determined by drawing a trendline between the extreme points.
While doing technical analysis, the Fibonacci retraction is taken by considering two extreme points that consist if a peak and a trough on a stock chart and by dividing the vertical distances. The Fibonacci number sequence consists of 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, where each term is the sum of the proceeding two terms and the sequence continues on into infinity. The vertical distance is divided by the key Fibonacci ratios that are 23.6%, 38.2%, 50%, 61.8% and 100%. These ratios are very important in the stock market in order to understand the critical points that may cause an asset’s price to reverse.
Understanding the Fibonacci Ratios
It is a popular technical analysis that is used by financial analysts and traders in order to understand the strategies that can be used for stop losses, transactions, and target prices. Retraction is used in a number of indicators like Gartley patterns, Tirone levels, Elliott Wave theory and many others. After there is a marked movement of the prices, the resistance, and support levels are near these lines.
Fibonacci Extensions
In order to understand the term better, one must learn about Fibonacci extensions, which are basically levels that are used to predict the areas of resistance and support. Extensions include all the levels that are beyond the 100% level. It is used by experts to predict the areas that will help them with profits. Some of the most famous extension levels are 161.8%, 261.8% and 423.6%. Traders use Fibonacci Extensions with other technical patterns in order to understand what the appropriate target prices are.
Further Reading
- Analysing the impact of covid-19 on stock market using fibonacci retracements – www.indianjournals.com [PDF]
- Energy Crypto Currencies and Leading US Energy Stock Prices: Are Fibonacci Retracements Profitable? – papers.ssrn.com [PDF]
- Using fibonacci numbers to forecast the stock market – orsociety.tandfonline.com [PDF]
