Understanding Fibonacci Retracement
Fibonacci Retracement is a popular technical analysis tool based on the key numbers identified by the mathematician Leonardo Fibonacci. In trading, it is used to identify potential support and resistance levels where a price reversal (a retracement or pullback) might occur after a significant market move.
Defining the Market Trend
Before applying any Fibonacci tool, a trader must first define the primary **market trend**. The trend is simply the general direction in which the market or asset price is moving. Fibonacci analysis is most effective when anticipating a temporary movement against this primary trend.
Fibonacci Retracement Concepts
A retracement is a temporary reversal in the direction of the price movement that does not indicate a permanent change in the trend. Traders use Fibonacci levels (23.6%, 38.2%, 50%, 61.8%, and 78.6%) to predict how far this reversal might go before the price resumes its original movement.
Uptrend Retracement (Pullback)
This occurs when the market is in a **primary uptrend** (making higher highs and higher lows). After reaching a high point, the price temporarily moves *downward* (a pullback). The Fibonacci tool is applied from the **Low Price** to the **High Price** of the preceding move to determine potential support levels where the downward movement might stop and reverse back up.
Downtrend Retracement (Rally)
This occurs when the market is in a **primary downtrend** (making lower lows and lower highs). After reaching a low point, the price temporarily moves *upward* (a rally). The Fibonacci tool is applied from the **High Price** to the **Low Price** of the preceding move to determine potential resistance levels where the upward movement might stop and reverse back down.
How to Use the Calculator
This tool requires you to define the recent **swing** (the move between a major high and a major low) and the intended analysis direction:
- High Price: Enter the highest price reached in the swing.
- Low Price: Enter the lowest price reached in the swing.
- Select Direction: Choose **Uptrend Retracement** if you expect a pullback, or **Downtrend Retracement** if you expect a rally.
- Click Calculate to display the target Retracement Prices.
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