What are Fibonacci retracements and how do they work?

Posted on 2023-04-18

Fibonacci retracements are a popular technical analysis tool used by traders to identify potential levels of support and resistance in a market. The tool is based on the idea that markets tend to retrace a predictable portion of a move, after which they may resume their trend.

The tool uses horizontal lines to indicate areas of support or resistance at the key Fibonacci levels before the price continues moving in its original direction. These levels are based on the Fibonacci sequence, a series of numbers in which each number is the sum of the two preceding numbers. The most important Fibonacci retracement levels are 38.2%, 50%, and 61.8%.

When a market is trending up, traders will look for areas of support at these Fibonacci levels to buy the asset. Conversely, when the market is trending down, traders will look for areas of resistance at these levels to sell the asset.

It's worth noting that Fibonacci retracements are not always perfect indicators of support or resistance. As with any technical analysis tool, traders should use them in conjunction with other indicators and analysis to make informed trading decisions.

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