Fibonacci retracement is a technical analysis tool used to identify potential levels of support and resistance for an asset's price movement. The tool is based on the idea that prices tend to retrace a predictable portion of a move, after which they will continue to move in the original direction. The Fibonacci retracement tool is applied to a chart that displays an asset's price movements, and it uses horizontal lines to indicate areas of support or resistance at the key Fibonacci levels before the price continues in its original direction.
The Fibonacci retracement levels are based on a sequence of numbers known as the Fibonacci sequence. The sequence starts with 0 and 1, and each subsequent number is the sum of the two preceding numbers: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, and so on. The key Fibonacci levels used in retracements are 23.6%, 38.2%, 50%, 61.8%, and 100%.
When an asset's price moves up, the retracement tool is used to draw a line from the low point to the high point of the move. The Fibonacci retracement levels are then drawn horizontally across the chart at the key levels mentioned earlier. These levels act as potential support levels for the asset's price movement, as traders expect the price to bounce off these levels and continue moving in the original direction. Conversely, when an asset's price moves down, the retracement tool is used to draw a line from the high point to the low point of the move, and the Fibonacci levels are drawn as potential resistance levels.
Traders use Fibonacci retracement levels as part of their technical analysis to identify potential areas of support or resistance for an asset's price movement. They can also use the tool to determine entry and exit points for their trades, and to set stop-loss and take-profit orders.
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