Fibonacci retracements can be used to identify prospective support and resistance levels in a number of markets.
In this post, we’ll look at how traders who trade various asset classes might use Fibonacci analysis on their charts, following up on our previous article on confluence and Fibonacci retracements.
Market analytics is rife with signs and tactics, as well as a myriad of methods for determining what to trade and how to trade it. As a trader will quickly discover, this is more of a probability study than a prediction.
As a result, analysis is mostly used to examine the past in order to gain a clearer image of the present. Sure, sometimes previous trends may repeat themselves in a manner similar to how they began, allowing the trader to identify a bias that could be useful in their methods. However, analysis, particularly technical analysis, is most commonly used as a risk management technique. This is where encouragement and opposition can play a role. Because it gives a structure within which the trader may implement their plan, support and resistance can be useful as a risk control method. Later, when the price is more advantageous, you can buy more.
Consider a trader who is bullish on EUR/USD but is having trouble timing the transaction or controlling their risk. Rather of following the trend upward due to FOMO (Fear of Missing Out), the trader should just wait for some form of support to appear, after which bullish positions can be probed. If the market remains bullish and the pair continues to build with a bullish structure, then this support should hold and I’ll be able to stay in the trade. Otherwise, the deal can be terminated with the purpose of loss minimization, and the trader can simply wait for a better price to enter the market.
HOW TO USE FIBONACCI TO DETERMINE SUPPORT AND RESISTANCE.
There are numerous methods for determining support and resistance, and the mechanisms for determining levels can range from simple to complex. One of the supposedly more complicated strategies, which is based on the Fibonacci number sequence, is actually fairly simple to utilize. This is the sequence, or at least a portion of it: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, and so on….
By adding the previous two numbers, the next number in the sequence can be discovered, and so on indefinitely. The mathematical relationships inside the series are what make it interesting. Each number is 1.618 times the value of the previous number.
This is known as ‘Phi,’ or The Golden Ratio, and it can be found all around us: in architecture, art, and even in nature, such as in the ratio of spirals in a pine cone or the breeding cycle of rabbits.
The significance of Fibonacci to traders is related to the mathematical relationship within the series. After the initial section, each number in the sequence is 61.8 percent of the value of the next number. As a result, 34 divided by 55 equals.618, and 55/89 equals.618. This link will continue to hold true indefinitely, and it is a critical variable in Fibonacci analyses on trader charts.
A 61.8 percent retracement of a significant move is commonly plotted.
Taking it a step further, each number in the sequence is 38.2 percent when split by two numbers later. As a result, 34 divided by 89 equals.382, and 89 divided by 233 equals.382.
This will also be plotted within a Fibonacci retracement analysis, with 38.2 percent of the examined move being shown.
The 23.6 percent retracement is calculated by dividing any number in the sequence by the number three places to the right. As a result, 34 divided by 144 equals. 236 divided by 233 is the same as 55 divided by 233. This relationship will hold indefinitely, providing us with yet another retracement level to add to our charts.
As a result of this, probable support/resistance levels based on the previous big move are 23.6 percent, 38.2 percent, and 61.8 percent, respectively, as shown below.
TAKING IT TO THE NEXT LEVEL
If you’ve ever seen Fibonacci applied to a trading chart, you’ve definitely seen a handful of extra levels, which are a little more subjective because they aren’t actual Fibonacci levels. The half-way point, often known as the 50 percent retracement, is a common chart feature. It has no Fibonacci value and just represents the halfway point of the studied move.
78.6 is another common level with some significance. Because there are two levels above and two levels below the 50 percent line, adding this level to the Fibonacci retracement creates a sense of balance. Because.786 is the square root of.618, it has some Fibonacci significance. The 78.6 percent retracement is frequently used to seek for ‘deep’ retracements or potential reversal opportunities.
FIBONACCI SUPPORT AND RESISTANCE TRADES.
Fibonacci retracement levels can be used as a support or resistance mechanism in any situation: As prospective until it comes into action, at which point it allows a trader to use an if-then sentence. If support holds, this trade could be profitable. If the support doesn’t hold, get out as soon as possible and seek better pastures elsewhere.
The subjective nature with which Fibonacci retracements might be applied adds to the intrigue. Long-term major changes can be used to find levels of interest for a larger-picture strategy, or intra-day levels for trading swings. Fibonacci can also be used on shorter-term charts to establish levels on which to base shorter-term themes and setups.
Finding a large move of note and then applying the Fibonacci retracement indicator from the start point of the move to the completion point is the starting point for applying a Fibonacci retracement. A Fibonacci retracement has been applied to the GBP/USD pair, focusing on the significant move that occurred around Brexit. This brings the June 2016 high of 1.5006 down to the same year’s low of 1.1950 in October. Notice the horizontal lines drawn at 23.6, 38.2, 50, 61.8, and 78.6 intervals: As prices continue to fluctuate, traders should look to these Fibonacci retracement levels for support and/or resistance.
The retracement levels established by this large move, as seen in the above chart, continue to have weight more than two years after the move initially came-in. Today’s short-term support comes in around the same 38.2 percent retracement level of 1.3117 that has been in action for the past few weeks; and this comes after an aggressive bullish reversal built-in off of support at the 23.6 percent mark in mid-August of this year.
In April, the Pound had a very different tone, and the 78.6 percent retracement of that same Fibonacci study helped to establish the yearly high in the pair around 1.4350. Earlier in the year, this happened on two separate occasions. Before the great reversal began to manifest, this resistance helped to indicate a double-top formation.
But even before that high, when the GBP/USD spent much of 2017 recuperating from the Brexit-related sell-off of 2016, the up-trend gyrated within that Fibonacci structure: 23.6 is a level of resistance, followed by support at the previous level of resistance. At the 38.2 percent retracement, as well as the 50 percent mid-point of the big move, a similar occurrence occurred.
APPLICATION ON EQUITIES
On a short and long-term basis, Fibonacci retracements can be used across equity indices. The earlier-year correction in US equities contributed to a 38.2 percent retracement in the Dow Jones Industrial Average, which took the low from the night of the 2016 Presidential election to the peak in January of 2018.
On a shorter time scale, the latest sell-off in US stocks indicated a 61.8 percent retracement of the prior positive trend from Q3, with follow-through instances of short-term intra-day support and resistance at the 50% and 38.2 percent levels.
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