How to use Fibonacci retracement

 Fibonacci retracement :-

Fibonacci retracement is a popular technical analysis tool used in the stock market to identify potential levels of support and resistance. It is based on the Fibonacci sequence and the Golden Ratio, which is approximately 1.618.



Traders and analysts use Fibonacci retracement levels to determine areas where the price of a stock or other financial instrument may reverse or consolidate before continuing its trend. Here's how Fibonacci retracement is applied in the stock market:

  1. Identify the Trend: First, you need to determine the prevailing trend in the stock. This can be an uptrend (higher highs and higher lows) or a downtrend (lower highs and lower lows).

  2. Select Swing Points: Identify significant swing points within the trend. A swing high is a peak, and a swing low is a trough. These swing points should be clear and well-defined.

  3. Measure the Fibonacci Levels: Using a Fibonacci retracement tool, apply it to the swing points. The tool will draw horizontal lines representing different Fibonacci retracement levels (typically 23.6%, 38.2%, 50%, 61.8%, and 78.6%) from the high point to the low point (or vice versa) of the trend.

  4. Interpretation of Levels: Traders analyze the retracement levels to determine potential support and resistance areas. The 50% retracement level is not a Fibonacci ratio but is included as a psychological midpoint. The 38.2% and 61.8% levels are considered critical, often acting as support or resistance. The 23.6% and 78.6% levels are considered minor retracement levels.

  5. Confirmation with Other Indicators: Fibonacci retracement levels are often used in conjunction with other technical indicators, such as trendlines, moving averages, or oscillators, to validate potential reversal zones.

  6. Trading Decisions: Traders may look for buying opportunities near Fibonacci support levels in an uptrend or selling opportunities near Fibonacci resistance levels in a downtrend. They may also wait for price action signals, such as bullish or bearish candlestick patterns, to confirm the entry or exit points.

fig-1
Above chart shows Fibonacci retracement from low to high and it take support @ 0.38% level, it acts as support and move up.

fig-2
Above chart shows Fibonacci retracement from High to Low and it take resistance @ 0.50% level, it acts as resistance and move down.


It's important to note that Fibonacci retracement levels are not infallible indicators. They are one tool among many in technical analysis and should be used in conjunction with other forms of analysis and risk management techniques.
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