levels are horizontal lines plotted on a chart using the corresponding tool
that display possible support and resistance levels. The levels are
based on the Fibonacci’s golden ratio, that is 1.618 and it can be used to
describe proportions of everything in nature, from atoms to complex patterns in
the universe like celestial bodies, therefore, many traders believe that these
numbers also have relevance in financial markets.
The
retracement levels are 23.6%, 38.2%, 61.8%, and 78.6%. While not officially a
Fibonacci ratio, 50% is also used. The indicator is useful because it can be
drawn between two significant price points, such as a swing high and a swing
low to pinpoint a possible entry on a pullback. In an uptrend you draw it from
the swing low to the swing high, while in a downtrend from the swing high to
the swing low. The tool will then display the levels between those two points.
The thing
that makes Fibonacci quite effective is because lots of traders use them and so
everyone expects others to act from Fibonacci levels making it almost a
self-fulfilling prophecy. Many traders also draw more Fibonacci levels from
different swings when they are confusing to get confluence.
Look for the
most obvious swings when drawing Fibonacci levels and try to get some
confluence with other technical concepts like support and resistance,
trendlines, indicators and so on. Fibonacci helps you to plot levels where a
retracement from the overall trend may bounce back giving you a trading
opportunity to enter or re-enter the market.
This article
was written by Giuseppe Dellamotta.