Discovery Trading - Fibonacci retracements

What are Fibonacci Retracements?

Fibonacci retracements are horizontal levels used to identify areas where the price could reverse or slow down in a trend. These levels are based on ratios derived from the Fibonacci mathematical sequence, where each number is the sum of the previous two. The most common retracement levels are 23.6 %, 38.2 %, 50 %, 61.8 %, and sometimes 76.4 %. These percentages are applied between a low and a high point on a price chart.

The main retracement levels are as follows:

• 23,6 % First retracement level used to identify a slight setback in the trend.
• 38,2 % : A higher level that may signal a more substantial reversal.
• 50 % Although this is not an exact Fibonacci ratio, many traders use it as a key level.
• 61,8 % The most significant retracement, often seen as the critical level for a major turnaround.
• 76,4 % A lower level, but sometimes used in certain strategies.

How are Fibonacci retracements calculated?

The calculation of Fibonacci retracements is based on two extreme points of a price movement: a low point (or start of trend) and a high point (or end of trend). The retracement levels are then plotted between these two points.

1. Identify Reference Points :

   • If you are in an uptrend, select a low and a high point.
   • If you are in a downtrend, select a high and a low point.

2. Apply Fibonacci Ratios:

   • 23.6 % retracement level Calculate 23.6 % of the total movement between the high and low points.
   • 38.2 % retracement level Calculate 38.2 % of the same movement.
   • 50 retracement level % : This corresponds to half of the total movement.
   • 61.8 % retracement level Calculate 61.8 % of the total movement.

Interpreting Fibonacci retracements

Fibonacci levels are mainly used to identify areas where the price could bounce back or meet resistance during a retracement, in the event of a strong trend underway. Here are a few ways to use them in trading:

1. Identification of Support and Resistance Zones :

   • Support (in an uptrend) : When the price pulls back from a peak, it may find support near Fibonacci levels (e.g. 38.2 % or 61.8 %), which could indicate a good entry point for a long position.
   • Resistance (in a downtrend) : When a price pulls back from a low, it may encounter resistance at a Fibonacci level, and this is a good opportunity for a short position.

2. Trend reversals :

   • Fibonacci retracements are often used to anticipate reversals. If the price reaches one of the key levels (38.2 %, 50 % or 61.8 %) and shows signs of consolidation or reversal, this may signal a potential trend reversal.

3. Confirmation by Other Indicators :

   • Use additional technical indicators, such as the RSI or MACD, to confirm the signals provided by Fibonacci retracements. For example, an oversold signal on the RSI at the same time as a bounce off the 61.8 % level could indicate a buying opportunity.

Practical example

Suppose you analyze the EUR/USD chart and identify a clear bullish move, where the price rises from 1.1000 to 1.1500. Now you want to know if the price could come back down before continuing its uptrend. Here's how you could use Fibonacci retracements:

1. Tracking Retracements :
   You place the low point (1.1000) and the high point (1.1500) on your chart. Fibonacci levels will then be drawn automatically, indicating possible support zones at 23.6 %, 38.2 %, 50 %, and 61.8 %.

2. Checking the Level of 38.2 % :

   • The price starts to pull back after reaching 1.1500. It reaches the 38.2 % retracement level, i.e. around 1.1300.
   • You can see that the price is beginning to stabilize around this level, with a bullish candle forming.

3. Confirmation with RSI:

   • The RSI is currently in the oversold zone, which may signal that the price is ready to rebound.

4. Long Position Entry:

   • On the basis of the rebound to the 38.2 % level and confirmation of the RSI, you can enter a long position with a profit-taking target around the following resistance levels, such as the 23.6 % level or the peak at 1.1500.

Using Fibonacci Tracing in Trading

Fibonacci retracements are used flexibly in different trading strategies to improve decision-making. Here are a few ways to incorporate them into your analysis:

1. Confirmation of Trend Direction:

   • Use retracements to confirm whether a bullish or bearish trend is continuing or whether a reversal is imminent.

2. Inputs and outputs :

   • Fibonacci levels can be used to determine entry points into an ongoing trend, and to position stop-loss and take-profit orders.

3. Monitoring Key Levels :

   • Watch for key Fibonacci levels such as 38.2 % or 61.8 % to observe areas where the price could reverse its direction, offering you trading opportunities.

Conclusion

Fibonacci retracements are a powerful tool in technical analysis, enabling traders to spot support and resistance levels, anticipate trend reversals and make informed decisions. By combining Fibonacci retracements with other technical indicators, you can refine your trading strategies and improve your results.

We hope this article has helped you better understand Fibonacci retracements and their use in trading. If you have any questions or would like to share your experiences, don't hesitate to join us on social networks with the hashtag #xenesy and identifying @xenesy_project. Happy trading!