Fibonacci Retracement
Technical AnalysisQuick Definition
A technical analysis tool that uses horizontal lines to indicate areas of support or resistance at key Fibonacci levels.
Detailed Explanation
Fibonacci retracement is based on the idea that markets will retrace a predictable portion of a move, after which they will continue in the original direction. The tool uses Fibonacci ratios (23.6%, 38.2%, 50%, 61.8%, and 100%) to identify potential reversal levels. These percentages represent how much of a prior move the price has retraced. The 61.8% level is considered the golden ratio and often acts as strong support or resistance. Traders draw Fibonacci retracements by identifying a significant price move and dividing the vertical distance by the key Fibonacci ratios.
Real Trading Example
After a stock moves from $100 to $150, a trader uses Fibonacci retracement to identify that the 38.2% level at $130.90 might act as support.