Fibonacci Retracement

1. Overview of Fibonacci Retracement

Fibonacci Retracement is a technical indicator used to identify key support and resistance levels in financial markets. It is based on the number sequence and ratios discovered by Leonardo Fibonacci and is helpful in predicting price reversal points and correction sizes.

This indicator is very effective for trend-following and counter-trend traders when determining entry and exit points.

2. Basic Concept of Fibonacci Retracement

Fibonacci Retracement consists of horizontal lines drawn between the high and low points of a trend, based on the following ratios.

1. Key Fibonacci Ratios:
   • 23.6%, 38.2%, 50%, 61.8%, 78.6%
2. Setting Start and End Points:
   • Uptrend: Draw lines from the low as the starting point to the high as the ending point.
   • Downtrend: Draw lines from the high as the starting point to the low as the ending point.
3. Meaning of Retracement:
   • When a trend temporarily corrects, lines based on these ratios often function as support or resistance.

3. How to Use Fibonacci Retracement

1. Confirming Support and Resistance
   • If the price reverses from an uptrend and temporarily stops at a Fibonacci line, it functions as support.
   • In a downtrend, the price often functions as resistance whenever it reaches a line.
2. Entry and Exit Timing
   • Prices tend to reverse at the 38.2% and 61.8% lines, which can be used as a guide for counter-trend entries.
   • If predicting trend continuation, plan a breakout strategy based on the retracement lines.
3. Combining with Other Indicators
   • Combine with Moving Average and RSI to increase the reliability of Fibonacci lines.
   • Combine with Bollinger Bands to confirm overbought/oversold conditions.

4. Practical Examples

Buy Scenario:Consider a buy entry if the price corrects to the 38.2% or 50% line during an uptrend and starts to reverse.

Sell Scenario:Consider a sell entry if the price approaches the 61.8% line during a downtrend and starts to reverse.

5. Precautions and Limitations

1. Not Universal
   • Fibonacci Retracement does not guarantee that the price will reverse at a line, making it important to use in conjunction with other indicators.
2. Trend Dependent
   • Without a clear trend, retracement lines can become noise.
3. Influence of Multiple Traders
   • Since many traders watch Fibonacci lines, psychological automatic reactions can affect the market.

6. Comparison with Other Fibonacci Tools

• Fibonacci Extension: A tool to predict target prices when a trend continues.
• Fibonacci Time Zone: Predicts reversal points along the time axis.

7. Summary

Fibonacci Retracement is a very effective tool for identifying support and resistance levels and as a basis for entry and exit decisions. It can be used in both trend-following and counter-trend strategies, making it widely applicable from beginners to advanced traders. However, combining it with other indicators and trend analysis is recommended to increase accuracy.

Master Fibonacci Retracement and make it a weapon for success as a Fundora prop trader.