In the world of trading, Fibonacci Retracement is a powerhouse tool used to identify hidden levels of support and resistance. It’s based on the idea that markets don't move in a straight line; they "breathe"—pulling back before continuing a trend.
1. How the Tool Works
Traders take two extreme points on a chart (a major high and a major low) and divide the vertical distance by the key Fibonacci ratios: 23.6%, 38.2%, 50%, 61.8%, and 78.6%.
The "Golden Pocket": The area between the 61.8% and 65% levels is often considered the most significant zone where a price reversal is likely to happen.
50% Level: Although not a Fibonacci number, it’s included in almost all trading platforms because markets frequently pull back to exactly half of a move.
2. How to Use it in a Strategy
You don't just "buy" because the price hits a line. You look for confluence—where the Fibonacci level aligns with other signals.
In an Uptrend: You wait for the price to drop (pull back) from a high. If it hits the 61.8% level and you see a bullish candlestick pattern (like a Hammer), that's a high-probability "Buy" signal.
In a Downtrend: You look for the price to rally (bounce) to a level like 38.2%. if it stalls there, it’s often a signal to "Sell" or "Short," expecting the trend to resume downward.
3. Fibonacci Extensions (Setting Targets)
While Retracements show you where to enter, Extensions help you decide where to exit (take profit). Common extension levels are 161.8% and 261.8%. If you bought at a pullback, these levels tell you how high the next "wave" might go.
4. Important Realities
Self-Fulfilling Prophecy: These levels work partly because so many traders are looking at them. When thousands of buy orders are placed at the 61.8% level, the price is naturally going to bounce.
Timeframes Matter: Fibonacci levels on a Daily or 4-Hour chart are much more reliable than those on a 1-minute chart, which can be full of "noise.
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