Fibonacci Retracement Technical Indicator

Fibonacci retracement is a charting technique based on Fibonacci ratios. It is widely used by traders of all types to find support and resistant levels, to find entry and exit points and to place stop losses. Fibonacci retracements come handy when prices of financial instruments retrace after noticeable up-trends. These retracements offer opportunities for traders to buy stocks/currencies/futures at low prices.

Fibonacci retracement technical indicator consists of horizontal lines plotted on trading charts. These lines are created as follows.

• First a trend line is created connecting two extreme points (highest and lowest points of a trend).
• Then retracement lines are plotted horizontally crossing the trend line at key Fibonacci levels (23.6%, 38.2%, 50%, 61.8% and 100%).

For a retracement trend these Fibonacci retracement lines is the most possible support level. The three key Fibonacci levels (38.2%, 50% and 61.8%) are considered most important levels. For the upward trend, this may occur after the retracement, these lines act as the resistant levels.

Most modern trading systems use Fibonacci retracements as a major technical indicator. Fibonacci retracements are also used in other indicators like Gartley patterns, Tirone levels and Elliot wave theory.


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