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Is Fibonacci Retracement a good indicator?


Nick Robinson
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As you know, Fibonacci Retracements are ratios that are used to identify potential reversal levels. These ratios can be found by using the Fibonacci sequence. The most popular Fibonacci Retracements are levels of 61.8% and 38.2%. Analysts apply Fibonacci ratios to define retracement levels and forecast the possible levels of a correction or a pullback.Fibonacci Retracements can also be used after a price decline decline to forecast the time period (length) of a counter-trend bounce. Fib retracements can be combined with other indicators (a strategy should have both time and price indicators) and price patterns to create an overall strategy.


I won't get into Fibonacci's mathematical properties on his sequence and the golden ratio, as it is not needed for trading. Also, this can easily be googled.

Retracement levels show traders where the potential trend reversal, resistance area or support area can lead to price-wise. Retracements are based on the prior move, and are only used when the main move is in the general trend of the market (so the retracement is more likely to happen than a new move). A bounce is expected to retrace a portion of the prior price decline, while a correction is expected to retrace a portion of the prior price increase.When paired with Volume/Money flow indicator, oscillators and a few more price patterns/indicators, Fib Retracements are a perfect way to dettermine the length of a move, and not only whether the price will go up or down.

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Hi Nick,

Fibonacci sequence looks like this: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89 and so on.

Following the progress of the sequence, each number is roughly 61.8% of the next number, approximately 38.2% of the following number, and roughly 23.6% of the number after that. If we subtract 23.6 from 100, the result is 76.4.

These numbers represent Fibonacci retracement levels - 76.4, 61.8, 38.2, and 23.6. Some models also include 50.

In instances where a stock is moving sharply in a certain direction, there is a possibility that the pullback will equal one of the percentages within the Fibonacci retracement levels. 

To be more specific, if a stock advances from $10 to $11, the expected pullback should amount to roughly 23 cents, 38 cents, 50 cents, 62 cents, or 76 cents. When a price is still gathering or losing momentum, it is more common to spot retracements of a higher percentage.

It’s important to understand that utilizing Fibonacci retracements is subjective. Given that there are several price swings in a single trading day, it doesn’t mean that every trader will be connecting the same two points. The two points you connect may not be the ones other traders connect.

In this case, a good plan is to draw retracement levels on all major price swings in order to mark where there is a group of Fibonacci levels. Doing this may help you point out an important price area.

Among all Fibonacci trading tools, retracement levels are the most commonly used. This is because they are relatively simple to use and because you can apply them to nearly any trading instrument. Among other things, retracements can be used to point out and confirm support and resistance levels, set stop-loss orders or target prices, and use them as a primary tool in a countertrend trading plan.
 

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Hello Nick,

Fibonacci retracements show the support and resistance stages where price might reverse direction. This tool is ideal for trending markets. The goal is purchasing at a support level during an uptrend and offloading at a resistance level during a downtrend.
Their regularity on historical Forex charts makes these retracements a useful indicator. However, treat Fibonacci levels as areas of possible swings instead of definitive points. Since retail traders stop exactly on the Fibonacci lines, it’s not uncommon for dealers to push price action past the supports or resistances.
This triggers numerous stops simultaneously leading to a cascading effect. Needless to say, traders don’t benefit because the price goes beyond the retracement zone. That’s why you should leave a gap around the expected reversal point.
Likewise, review past trends. Repeated testing strengthens a Fib level and raises the possibility of a similar future occurrence. You can also include extra tools like RSI to ascertain the outcome and spot hidden trading opportunities.
 

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