Fibonacci Retracements in Forex are a technical analysis tool used to identify potential support and resistance levels during market pullbacks. Derived from the Fibonacci sequence, common regression levels include 23.6%, 38.2%, 50%, 61.8%, and 78.6%.
How It Works:
- Traders draw retracement levels between a significant high and low on a price chart.
- The levels indicate possible areas where the price may reverse or consolidate before continuing in the original trend.
Key Uses:
- Entry Points: Identify potential zones to enter trades during a retracement.
- Stop-Loss Placement: Position stops just beyond key levels.
- Take-Profit Targets: Use levels to predict where price may reverse.
By incorporating Fibonacci retracements, traders can improve their precision in identifying market opportunities.
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This is an excellent tool for the currency market. It is used by the great majority of traders to locate trade entry points. The Fibonacci retracements are actually just another type of resistance and support. To show how well they function, let us look at a few examples:
As you can see, the price corrects itself precisely to the 78.2% retracement line and then rebounds after the trend has shifted from downward to upward.
decline, correction to the 50% retracement, and subsequent decline.
Uptrend, retracement to the 61.8% mark, and subsequent recovery. The 50% retracement is, in my opinion, the most dependable, followed by the 61.8% and the 78.2%, in that order.
The 38.2% retracement level is another one, but I do not use it since I do not believe it represents a full correction; instead, I believe the price must move to 50% or higher. Naturally, it is possible that the market will retrace the entire previous move and this should be considered, but the 50% level is by far the strongest.
Plotting the fibonacci retracements on the chart also involves determining whether a fibonacci level and a prior support/resistance zone are confluent, as seen below:
The chart above shows that the recent lower bottom, which serves as small resistance, corresponds with the 61.8% retracement when the price reverses and restarts the decline.
The price has now reached the 61.8% retracement level, which also happens to be a resistance zone, providing a greater indication that the downward trend will resume.
An even more powerful signal is provided if the trendline and the Fibonacci retracement level coincide. The strongest indication that the trend will resume is if all three confluence at the same level.
As you can see from the above chart, we are in a very strong uptrend with a trendline in place. The price then retraces back down to the trendline, which is at the 61.8% retracement level.
It is a powerful signal. Additionally, it then returns to the 50% retracement level, which is also exactly at the trendline once more and serves as a small support level indicated by the most recent higher high. This signal is really powerful. In conclusion, there is a greater indicator that the trend will resume from that point on if there is more convergence of occurrences at a particular price zone.
Okay, so now we have a thorough understanding of how to spot a trend, support and resistance zones, Fibonacci retracement levels, and how effective they are when combined with other support and resistance zones. Let us go on to this strategy’s final element.
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