The Fibonacci series was discovered in the 12th century by an Italian mathematician named Leonardo Pisano Bogollo, otherwise known to his friends as Fibonacci. Using the same series and its relationship with almost everything, the method of Fibonacci Retracement was created to find the support and resistance level. However, it is wise to use the Fibonacci Retracement in conjunction with other technical indicators.

Investors utilise a multitude of indicators during technical analysis. However, there is one approach that was never intended for the stock market but is still utilized by investors to pick winning stocks. The Fibonacci Retracement Method is one of the most intriguing yet perplexing approaches that appear to be working well for investors without them knowing how.

Let’s go back to when you were in school and had to figure out the relationship between previous number series to fill in the gaps that followed.

This blog will help you understand Fibonacci Retracement, a mathematical approach that investors use to perform technical analysis and make sound decisions.

What do you mean by Fibonacci retracement?

Fibonacci Retracement levels are horizontal lines that show potential levels of support and resistance. When the market is trending, it works. It is known as a predictive technical indicator because it tries to predict where the price will be in the future. According to this idea, after the price begins a new trend direction, it will retrace or return partially to a previous price level before resuming the trend’s direction.

The Fibonacci Retracement draws percentage retracement lines based on the mathematical link within the Fibonacci sequence. These retracement levels provide support and resistance levels that can be utilised to set price targets.

Fibonacci Retracements are calculated using the Fibonacci Retracement numbers and the accompanying Golden Ratio.  The Fibonacci series is a mathematical sequence of integers whose value is the sum of the two numbers before it. The Fibonacci Retracement series is as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610.

Understanding the meaning of technical analysis

The study of chart patterns, graphs, and diagrams on a computer screen is known as technical analysis. The goal is to evaluate price and volume tendencies before selecting a specific stock. The concept of technical analysis is that historical price trends tend to replicate themselves over time. You sit with historical stock charts, look at price and volume data, and then plot various trends in technical analysis. Here, technical analysts trade for the future based on prior experience. One of the most common methods of performing technical analysis is to examine the stock’s past price patterns and compare them to the current price in order to comprehend the stock’s performance and potential.

What are the levels of Fibonacci retracement?

Fibonacci Retracement Levels notify traders or investors of a pattern reversal, resistance area, or support area. Retracements are calculated based on the previous move. Fibonacci numbers were first determined using a mathematical idea developed centuries ago. Each level is represented by a percentage. The percentage represents how much of a previous move the price has retraced.

The Fibonacci Retracement levels are 23.6%, 38.2%, 61.8%, and 78.6%.  This indication is valuable since it may be drawn between any two notable points of price, such as high and low. Fibonacci numbers can be seen throughout nature. These figures are important in the world of finance.

However, it is important to understand that these levels should not be relied on entirely because assuming that the price will reverse after reaching a given Fibonacci level can be risky.

Calculating Fibonacci Retracement Levels   

There is no algorithm for determining Fibonacci levels.  They are just percentages of the given price range. This number string is the source of all Fibonacci retracement levels.  Once the sequence starts, dividing one number by the next returns 0.618, or 61.8%. When a number is divided by the number to its right, the result is 0.382, or 38.2%. Traders create them on a chart by recognising the trend and taking into account the potential price range for a certain asset at the support and resistance levels.

The next step is to compute the difference between the two prices to determine a target price. The trader must then multiply the result by the Fibonacci ratio or percentage and subtract or add it to the peak or low of the trend.

Traders use the following formula to compute Fibonacci levels based on an asset’s price movements in the financial market:

High Swing – ((High Swing – Low Swing) Fibonacci %) Uptrend Retracement

Low Swing + ((High Swing – Low Swing) Fibonacci percentage) = Downtrend Retracement

Understanding Fibonacci Retracement and Fibonacci Extensions

Fibonacci retracement levels are horizontal lines that indicate where a price may retrace. The Fibonacci Retracement Levels reveal to the investor the critical locations of support and resistance levels. Fibonacci retracement levels are related by a single percentage point. These percentage points indicate how much of a previous price impulse the price has currently retraced.

Fibonacci Extensions are levels utilized by traders to identify potential profit targets and forecast the continuation of a price advance following a pullback or reversal. Fibonacci extensions can help you understand reversals and potential price obstacles. Fibonacci Extensions are critical locations where the price of a stock, forex pair, or commodity may reverse.

Understanding the Pros and Cons of Fibonacci retracement

Below, we have enlisted the pros of the Fibonacci movement:

• Accuracy is determined by the pivot point. They can quite correctly predict the times of price reversals at early levels or confirm a shift in trend direction at later levels with the proper settings.
• The technique applies to assets in any market and at any timeframe. There is, however, a catch: the higher the period, the more precise the signals. Even though Fibonacci is a popular tool among scalpers working on M1 and M5, price noise causes inaccuracies.
• Most technical indicators are based on a formula that reflects past-period patterns. Fibonacci levels are based on both a mathematical method and popular psychology; this can be considered while developing a Fibonacci trading strategy.

 Below, we have tried to enumerate the cons of Fibonacci retracement

• A trend is never entirely flat. Even after leaving the flat, determining the starting location can be tricky.
• They occur frequently in this tool. And these messages are not as deceptive as they are imprecise. The price can turn around before reaching the level or after breaching it and turning around amid the zone.
• It is not possible to write an automatic grid creation algorithm into the EA code. As a result, the instrument cannot be employed in algorithmic tactics.

 

Fibonacci Retracement levels are frequently used to identify reversal points. These levels serve as a tool within a larger strategy. This technique should ideally look for the convergence of numerous indicators to find probable reversal regions with low-risk and high-potential reward trade entries.