Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician Leonardo Fibonacci in the thirteenth century. However, Fibonacci's sequence of numbers is not as important as the mathematical relationships, expressed as ratios, between the numbers in the series. In technical analysis, Fibonacci retracement is created by taking two extreme points (usually a major peak and trough) on a stock chart and dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%.

Fibonacci Retracement is a leading indicator that is used to predict future price movement of a currency pair. This indicator can be used in different trading markets such as stocks, futures and forex. Well what is Fibonacci and how does it work, I will tell you in this thread?

Fibonacci Retracement says out of a larger movement the price will retrace a certain percentage of that larger move before continuing in the original direction. The mean for those percentages is 61.8%. This number is the Golden Rule.

1- How to draw Fibonacci Retracement.

If you draw a line from the peak of the high and the lowest of the low you have what is called the larger movement, when you draw Fibonacci go with price direction

Figure 1.1

The goal is to find a large movement. Large meaning a definite high and low point. You can use Fibonacci almost as well on smaller chart time frame. I only say almost because the larger time frame more reliable most signals and strategies are.

Please see figure number 1.1. So, here we have found our high and low point. Then we will need to draw the Fibonacci line in the direction of the movement. Here our movement is downward, so we draw the line from the top to the bottom. The indicator will then draw the percentages automatically of that movement. It will draw the line at 50% retracement. This is 50% of the larger movement. 50% retracement means if the price retraces back to that line it has retraced 50%. There are other lines and proportions drawn automatically as well; 38.2%, 61.8%, 78.6%, retracements. There are several other retracement percentages, but these are the ones that are predominantly utilized in trading, see figure 1.2.

Figure 1.2

How we can draw Fibonacci retracement?

1- First of all you have to choose your period chart, then you have to choose clear custom period of your chart, and it should be upward or downward.

2- Then you have to assign the top “Head” and the “bottom”

3- After that you can drag Fibonacci Retracements in two ways, but you have to know the direction of the chart downward or upward.

4- In both ways (downward or upward) start draw from start point to end point.

- If the chart period was in “upward” Fibonacci Retracements will be drawn from down “bottom” to the top, in this situation the zero point in the top and the 100 point will be down.

- If the chart period was in “downward” Fibonacci Retracements will be drawn from top to the bottom, in this situation the zero point in the down, and the 100 point will be top.

You have to know that if the peak and trough were longer, the result will be truer and more reliable.

Actually, when you try to use Fibonacci retracement on weekly or daily chart the direction will be long, but in hourly chart it will be just peak and trough, you can use Fibonacci retracement for long term chart, and if the direction period come bigger Fibonacci retracement effect will be stronger and truer and more reliable, most of analyst use daily chart, and the period between 10 days to 45 days.

2- Support and resistance

How we can use Fibonacci retracements in technical analysis, Fibonacci retracements on of the most important tool to help market analyst to know where is the support and resistance levels, the idea of these two levels means after upward phase it should be correction ratio… vice versa.

Here is a patch to take the opposite direction of the arrow direction of the shares, see figure 2.1.

Figure 2.1

Think of prices for financial instruments as a result of a head-to-head battle between a bull (the buyer) and a bear (the seller). Bulls push prices higher, and bears lower them. The direction prices actually move shows who win the battle

Support is a level at which bulls (i.e., buyers) take control over the prices and prevent them from falling lower.

Support levels indicate the price where the most of investors believe that prices will move higher. Resistance levels indicate the price at which the most of investors feel prices will move lower.

3 - How Fibonacci retracement work.

Selection Criteria

The following tips may help you use Fibonacci retracements.

• Select a significant move from swing high to swing low (or reverse). You want a move tall enough to represent a profitable trade should price return to the swing high/low after purchase.

• I consider the 62% retracement value the most reliable. Measure the move from swing high/low to swing low/high and multiply it by your favorite retracement value (0.38, 0.5, 0.62 or other value) and then add it to the swing low (downtrends) or subtract it from the swing high (uptrends).

• Watch for overhead resistance or underlying support as price approaches the end of the trend. In the example above, when price drops to point “Support retracement level”, the end of the trend, it could stall or even reverse there.

• If the correcting movement price direction access 61.8, this situation called Breakthrough, be note that the price shouldn’t break 100 and 0 levels, if it access it your study will be wrong and not accurate.

• Don’t use Fibonacci retracement until the price reach to 23.6 level,

• Fibonacci retracements allow traders to estimate price regions where price may retrace to during dips and rallies. The primary Fibonacci retracement percentages are based on the inverse of the 1.618 Golden Ratio, which is 0.618, or 61.8%. Besides this key level, there is also the important 38.2%. Another very significant Fibonacci retracement percentage is 50%. Other percentages include 23.6% and 76.4%. For the most part, however, the most popular Fibonacci retracement levels, by far, are 38.2%, 50%, and 61.8%, most effective degree in Fibonacci retracement. 61.8%, 50%, 38.2% are strong lines, and 61.8 is the most strong point.

• There are always minor dips in up trends and minor rallies in downtrends. These areas are among the best places to enter trades in the direction of the trend. In an uptrend, for example, traders always seek to buy low and sell high. Buying on a minor dip within an uptrend means entering at a relatively low price. In a downtrend, traders always seek to sell, or short, high and then buy back, or cover, low. Selling on a minor rally within a downtrend means entering at a relatively high price. These are considered advantageous trade entries.

After a large price movement, technical traders pay particular attention to these retracement levels. For example, if the price of a stock has recently shot up, a technical trader might sell until the price declined to the 38.2% level and begin buying when it reached the 61.8% level, see figure 1.1.

Conversely, after a big decline, the same trader might buy until the price recovered to the 38.2% level and begin selling as the price approached the 61.8% level.

You will see than in 13:17 the price access 38.2%and that mean the price will go down, because it’s a resistance level and the price cross the resistance level, and in this case the resistance level will be 23.6%, and you see in 13:41, the price crossed the resistance level 23.6% that mean the price will go on.

Figure 3.1 Resistance level after a loss

Figure 3.2 Supports level after a gain.

As you can see in figure 1.2 the price went up in 13:41 and in 13:49 there is a high crossed 61.8% level, and it mean 61.8% is support level, and the price crossed it, and we suppose 50.0% is the support level, you have to buy here and check when the price will cross the second support level, and 14:00 the candle crossed the support level 50.0%, and it mean it will go up again, in this case I will buy.

Let us see this example; I hope this example will explain every thing about Fibonacci retracement:

Figure 3.3

As you can see in figure 3.3 in EUR/USD there is a big movement from top to down, so we will drag the Fibonacci retracement from the left top to right down, in point 1, the price crossed 50.0% level, and we will suppose the 38.2 level is resistance level, but in point 2 the prices crossed the resistance level again, and I will sell in this point because the price will go down, but in final resistance level point 4, the price didn’t crossed (accessed) it, and it mean our studies is working well, and the price will do up, and this is what happened, see figure 3.4 point number 5, it went up again, and crossed support level 38.2 it means that the support level 38.2 is canceled and the new support level should be 50.0.

Figure 3.4

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