Fibonacci Retracement

Named after the famous mathematician Leonardo Fibonacci, this method is a common technical tool used by currency traders. It is derived from the Fibonacci Series which is as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89 and so on; each term in the sequence being the sum of the two preceding terms. For the retracement analysis ratios between numbers in the series is what matters. The key ratios are 23.6%, 38.2%, 50%, 61.8% and 100%.

The Golden Rule, as it's called, is the proportion of things in the larger picture. Fibonacci Retracement states that out of a larger movement the price will retrace a certain percentage of that larger move before continuing in the original direction. The mean for those percentages is 61.8%. This number is the Golden Rule.

The goal is to buy on a retracement support level on a market uptrend and sell on a resistance level on a downtrend. You can find these retracement levels by connecting recent highs and lows. Remember that this tool is best used in trending markets and over larger periods so that signals are more reliable.

Example

In the example below we have found the definite high and low. Since it's a downward trend draw the Fibonacci line from the High to the Low. Retracement levels are automatically drawn by the trading software (any good trading platform should support that).


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