Fibonacci retracements are widely used in technical market analysis. There are many technical analysis indicators, but none are as practical and efficient as retracements, which are an essential tool for traders. Investors must understand them to operate correctly in the Forex market and other markets.
Fibonacci retracements originate from the theory of Pisan mathematician Leonardo Fibonacci, who devised a "magical" sequence of numbers based on his study of the proliferation of rabbits. The Fibonacci sequence has found empirical results in various forms, including financial.
Fibonacci retracements are divided into 6 levels arranged horizontally: 0%, 23.6%, 38.2%, 50%, 61.8%, and 100%. These levels are used to identify a potential market entry point. For example, if a stock retraces an upward trend, it’s useful to understand where the price might pause before continuing its upward trend.
Fibonacci retracements therefore help identify these price corrections and initiate trades at the right time. Specifically, the range between 38.2% and 61.8% is where a stock most commonly pauses before continuing its trend.
In general, if the price breaches the 61.8% level, the trend is considered severely compromised, while if it rebounds to the higher areas, it confirms the strength of the trend. Therefore, the Fibonacci indicator is an indicator that traders cannot ignore and must study in depth.
To learn about the potential of Fibonacci retracements, understand how they work, and gain in-depth knowledge of their application, Money.it suggests you read Fibonacci retracements in Forex: what they are and how they work.
