Fibonacci Retracement is a technical analysis tool used in financial markets to identify potential levels of support and resistance. It is based on the Fibonacci sequence, a mathematical concept where each number is the sum of the two preceding ones. The key Fibonacci retracement levels are derived from ratios based on these numbers, particularly the golden ratio, which is approximately 1.618.
Here are the main Fibonacci retracement levels used in financial markets:
- 0% (Starting Point): This level represents the beginning of the move and is often labelled as 0%.
- 23.6%: Derived from the Fibonacci sequence, this level is considered the first level of retracement.
- 38.2%: This level is another common retracement level, indicating a deeper pullback.
- 50%: While not a Fibonacci number, the 50% level is widely used and is not part of the Fibonacci sequence. It represents a halfway point and is considered a significant retracement level.
- 61.8%: (Golden Ratio): Also known as the golden ratio, this level is derived from the Fibonacci sequence and is considered a key level of support or resistance.
- 100% (Starting Point): This level represents a complete retracement of the initial move, essentially bringing the price back to the starting point.
Traders and analysts use Fibonacci retracement levels to identify potential areas where the price of an asset might reverse or consolidate. The idea is that these levels act as psychological and technical levels of interest for market participants.
The process of applying Fibonacci retracement involves identifying a significant price move (swing high to swing low or vice versa) and then plotting the retracement levels on the chart. Traders often use Fibonacci retracement in conjunction with other technical indicators to make more informed trading decisions.