How are Fibonacci retracement levels used in trading?

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by heather , in category: Stocks and Equities , 4 months ago

How are Fibonacci retracement levels used in trading?

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1 answer

by jaylin.bartell , 4 months ago

@heather 

Fibonacci retracement levels are used in trading as a technical analysis tool to determine potential levels of support and resistance in a financial market. Traders often use these levels to identify potential entry and exit points for trades.


The Fibonacci retracement levels are derived from the Fibonacci sequence, a mathematical pattern where each number is the sum of the two preceding ones (e.g., 1, 1, 2, 3, 5, 8, 13, 21, etc.). The key Fibonacci retracement levels used in trading are 23.6%, 38.2%, 50%, 61.8%, and 78.6%.


When a financial asset is undergoing a price correction or a pullback after a significant move, traders plot Fibonacci retracement levels on a chart from the high to low (or low to high) of the previous price swing. These levels are potential areas where the price could retrace or reverse.


Traders believe that these Fibonacci retracement levels indicate levels of support or resistance based on the psychology of market participants. For example, when a market is in an uptrend and pulls back, traders may look to buy near the 38.2% or 50% retracement level as they expect buyers to regain control and push the price higher again. Conversely, if a market is in a downtrend and retraces, traders may look to sell near the 38.2% or 50% retracement level as they expect sellers to regain control and resume the downtrend.


However, it is important to note that Fibonacci retracement levels are not foolproof and should be used in conjunction with other technical analysis tools and indicators to make well-informed trading decisions.