This is one of the most used indicators in technical analysis, which even professional traders cannot afford to use. In this article, we will tell you how to use the Fibonacci retracement to increase your chances of making a profit in trading.
A technical analysis tool that traders use to identify potential support and resistance levels in technical analysis. This tool is based on the idea that prices will often repeat a predictable portion of a move, after which they will continue to move in the original direction. This predictable behaviour is known as Fibonacci retracement.
Fibonacci retracement levels are calculated using Fibonacci sequence ratios. The most commonly used ratios are 23.6%, 38.2%, 50%, 61.8% and 100%.
These ratios are derived by dividing the number in the Fibonacci sequence by the number immediately following it. To give you a better idea, a ratio of 34 divided by 55 is approximately 0.618, which is the basis for the 61.8% Fibonacci retracement level.
Traders can use Fibonacci retracement levels to determine where to place orders to enter and exit. For example, if a trader believes that the price of an instrument is likely to make a minor correction after an uptrend, he or she may place a buy limit order near the 38.2% or 50% Fibonacci retracement level. If the price does indeed fall slightly and then continues to move higher, the trader may enter a take profit near the 61.8% Fibonacci retracement level to collect a profit.
In addition to using Fibonacci retracement levels for entry and exit, traders can also use these levels to set stop-loss orders. For example, if a trader is in a long position and the price starts to move against him, he can place a stop-loss order near the 61.8% Fibonacci retracement level to limit his potential losses.
Trading strategies that are based primarily on the use of Fibonacci retracement levels (see above). These strategies can be used in a variety of ways, for example to identify potential support and resistance areas, set stop-loss orders or determine take profits.
One other classic Fibonacci strategy is to use the 50% retracement level as an entry point. This method is based on the idea that the 50% level represents a significant level of support or resistance and that prices are likely to bounce off this level before continuing in their original trend direction.
Another popular Fibonacci strategy is to use the 61.8% retracement level as a take profit level. This is based on the idea that the 61.8% level represents a strong resistance level and that prices are likely to try to break this level. By setting a profit target at this level, traders can take advantage of this resistance and exit their positions profitably. Alternatively, one can also take advantage of the opportunity to place a pending Buy Stop order above this level, which can be seen as speculating on a breakout in the direction of the uptrend.
Thus, if you decide to incorporate Fibonacci retracement into your trading, you can look forward to a valuable tool that can reveal key support and resistance levels, which will improve your decision-making process regarding the question: where to enter, where to stop loss and where to take profit. In addition, within the psychology of trading, you can use Fibonacci strategies and levels to take advantage of the predictable price behavior at these key levels.
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