Fibonacci Retracement: a key tool in trading analysis

In 2024, Fibonacci Retracement remains a vital tool for traders, offering insights into potential market reversals. This article explores the fundamentals of Fibonacci Analysis and how it can be effectively applied in modern trading strategies

Fibonacci Retracement: a key tool in trading analysis

Fibonacci Retracement is a widely used technical analysis tool in trading, based on the idea that markets will retrace a predictable portion of a move, after which they will continue to move in the original direction. It's named after the 13th-century mathematician Leonardo Fibonacci, whose sequence of numbers has unique properties that can be applied to various aspects of nature and finance.

Fibonacci Retracements are a series of numbers that relate to each other in a special order. Fibonacci's famous number series works like this: each number in the series is the sum of the previous two: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, etc.

The basics of Fibonacci Retracement

Fibonacci Retracement involves the use of horizontal lines to indicate areas of support or resistance at the key Fibonacci levels before the price continues in the original direction. These levels are derived from the Fibonacci sequence and are often set at 23.6%, 38.2%, 50%, 61.8%, and 100% of the price movement. Traders use these levels to identify strategic places for transactions, stop losses, or target prices.

Applying Fibonacci Analysis in trading

In trading, Fibonacci Analysis is used to predict the extent of the correction or pullback in a trending market. Traders plot these levels on a chart to identify potential reversal points where they might make entry or exit decisions. The analysis is most effective when used in conjunction with other forms of technical analysis, such as trend lines and moving averages, to validate the signals provided by Fibonacci levels.

Advanced techniques in Fibonacci Retracement

For more experienced traders, advanced techniques involving Fibonacci Retracement include using it in combination with other indicators like Elliott Wave Theory, MACD, or RSI to increase the reliability of the signals. Some traders also look for confluences with other patterns, such as candlestick patterns, to enhance the accuracy of their trading strategies. Another advanced approach is to use Fibonacci extension levels to predict where the price might go following a retracement.

Key figures

In technical analysis, the Fibonacci Retracement is created by taking two extreme points (usually a major top and bottom) on a chart and dividing the vertical distance by the key Fibonacci numbers 23.6%, 38.2%, 50%, 61.8% and 100%.

When these levels are identified, horizontal lines are drawn that are used to identify possible support and resistance levels.

If you apply other Fibo numbers to these formulas you will notice that some results differ slightly from the above mentioned percentages. This is because they represent approximated results.

Identify a clear trend

Fibonacci analysis works best when there is a clear trend in the market. To place Fibonacci retracement levels on a chart, you must first identify the main trend. If there is a bullish trend , you need to draw Fibonacci retracements from the point where the trend started (low) to the point where it ended (high). (See picture below). If the main trend is bearish, the starting point of Fibonacci retracements will be the first top of the trend, while the ending point will be the last

If you use the Fibonacci Retracement levels, you need to keep in mind the following:

1. Fibo Retracement levels can alert traders of a potential trend reversal, resistance or support area.
2. However, DO NOT use it alone. It is often used with other technical analysis indicators such as moving average, stochastics, RSI, or MACD.
3. And always wait for confirmation. Do not forget, if you stick to the high probability trades you’ll have a better chance to come up ahead in the long run.

Skilling Summary
Fibonacci’s are a more advanced form of technical analysis and unique in their design. However, they are extremely popular and used by many professional traders. Although they may seem somewhat almost mystical in nature, for whatever reason (possible because so many people are watching the levels they become self-reinforcing) they seem to work for a lot of people. In addition, although the ratios may seem obscure at first, once the lines are drawn on the chart they become less important (as the Skilling platform automatically works them out and plots them for you). So, overall, Fibonacci's can play a very important role for all advanced traders.