A Fibonacci retracement is a term used in technical analysis that refers to areas of support price stops going lower or resistance price stops going higher. Fibonacci retracement levels use horizontal lines to indicate areas of support or resistance at the key Fibonacci levels before the trend continues in the original direction.
These levels are created by drawing a trendline between the high and low and then dividing the vertical distance by the key Fibonacci ratios of Fibonacci retracement levels are static prices that do not change, unlike moving averages. The static nature of the price levels allows for quick and easy identification. This allows traders and investors to anticipate and react prudently when the price levels are tested.
These levels are inflection points where some type of price action is expected, either a rejection or a break. Fibonacci retracement price levels can be used as buy triggers on pullbacks during an uptrend. It is prudent to have a momentum indicator like stochastic or a MACD oscillator to pinpoint the most advantageous entries.
In downtrends, the levels can be used to short sell when bounces reject off a Fibonacci retracement level. When a price level overlaps with other indicator price levels like a day moving average, then it becomes a fortified price level, making it an even stronger support or resistance.
The most significant Fibonacci retracement level to watch for is the 0. This is the inverse of the golden ratio, 1. On downtrends, the 0. Some traders prefer to wait for two to three candlestick closes above or below a Fibonacci retracement level to confirm support or resistance before placing a trade.
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