Fibonacci Retracement is a technical analysis tool used to identify potential levels of support and resistance in a price chart. It is based on the Fibonacci sequence, a mathematical sequence where each number is the sum of the two preceding numbers (e.g., 0, 1, 1, 2, 3, 5, 8, 13, 21, and so on). Fibonacci retracement levels are drawn by identifying a significant price move or swing in a chart, typically from a low point to a high point (in an uptrend) or from a high point to a low point (in a downtrend). The retracement levels are then calculated by applying the Fibonacci ratios (typically 23.6%, 38.2%, 50%, 61.8%, and 78.6%) to the distance of the price move.
The Fibonacci retracement levels act as potential areas of support (in an uptrend) or resistance (in a downtrend) where the price might retrace or reverse its direction before continuing the overall trend. These levels are considered significant as they are believed to reflect common points where traders may enter or exit positions, resulting in price reactions.
Traders use Fibonacci retracements in combination with other technical analysis tools to confirm potential reversal zones and identify possible entry or exit points. For example, if a stock is in an uptrend and experiences a pullback, a trader may look for the price to retrace to one of the Fibonacci retracement levels before considering buying opportunities.
It's important to note that Fibonacci retracements are not foolproof and should not be solely relied upon for trading decisions. They are just one tool among many used in technical analysis, and it's essential to consider other indicators, chart patterns, and market conditions before making trading choices.
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