Fibonacci retracement is a method of technical analysis used to determine support and resistance levels in financial markets. It is named after the Fibonacci sequence, a series of numbers that can be derived from the Golden Ratio. Here are the key points about Fibonacci retracement:
Fibonacci retracement levels are horizontal lines that indicate where support and resistance are likely to occur.
Each level is associated with a percentage, representing how much of a prior price move the current price has retraced.
The most commonly used ratios are 23.6%, 38.2%, 50%, 61.8%, and 78.6%. Although 50% is not an official Fibonacci ratio, it is also widely used.
Traders can draw the indicator between any two significant price points, such as a high and a low.
For example, if the price of a stock rises by $10 and then drops by $2.36, it has retraced 23.6%, which corresponds to a Fibonacci number.
Fibonacci numbers are found throughout nature, leading many traders to believe they also have relevance in financial markets.
The concept of Fibonacci retracement levels dates back to ancient India, formulated between 450 and 200 BCE.
Despite its name, the Fibonacci sequence was not developed by its namesake, Leonardo Fibonacci. Indian mathematicians, including Acarya Virahanka, were the first to work with these numbers.
The formula for calculating Fibonacci retracement levels is not fixed; users choose two relevant price points on a chart, and the indicator calculates the levels between them.
Remember that while Fibonacci retracement levels are useful, they should not be relied upon exclusively. It is dangerous to assume that the price will reverse after hitting a specific Fibonacci level. Markets are complex, and other analysis methods should also be considered.