What is Fibonacci Retracement and impact on trade .📈📉
FR is a technical analysis tool used to identify potential support and resistance levels in financial markets. It is based on the idea that prices will often retrace a predictable portion of a move, after which they will continue in the original direction. Here's a detailed look at Fibonacci Retracement
1. Fibonacci Sequence The tool is derived from the Fibonacci sequence, a series of numbers where each number is the sum of the two preceding ones, starting from 0 and 1 (e.g., 0, 1, 1, 2, 3, 5, 8, 13, ...). Ratios derived from this sequence, such as 23.6%, 38.2%, 50%, 61.8%, and 100%, are used in retracement levels.
2. Calculation
- Identify a significant peak and trough on a price chart.
- The Fibonacci retracement levels are then drawn by connecting these two points with a trendline.
- Horizontal lines are drawn at key Fibonacci levels: 23.6%, 38.2%, 50%, 61.8%, and sometimes 76.4%, between the peak and trough.
3. Usage
Support and Resistance These levels act as potential support and resistance levels where the price might reverse or consolidate.
Entry and Exit Points Traders use these levels to decide entry points for buying or selling or to place stop-loss orders.
Trend Continuation The retracement levels can indicate points where a correction is likely to end, allowing the original trend to continue.
4. Interpretation
23.6% Level Minor retracement, indicating a strong trend.
38.2% and 50% Levels Common retracement levels, often used by traders to gauge the strength of the trend.
61.8% Level Deep retracement, suggesting a potential reversal or a strong support/resistance level.
- 100% Level Indicates a full retracement of the previous move.
5. Limitations
- Fibonacci retracement levels are not foolproof and should be used in conjunction with other technical analysis tools and indicators.
Market conditions, such as news events or economic reports, can render these levels less effective.$BTC