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New Horror Story: “Fibonacci Fear”
The stock market trader relied on the simple formula of Fibonacci retracement, until the numbers began to haunt him. The spiraling sequence led him to unspeakable horrors in the depths of his data screen.
Article:
Fibonacci Retracement: A Simple Formula for technical analysis
Fibonacci retracement is a technical analysis tool that helps traders identify potential levels of support and resistance in a market trend. The basic idea behind Fibonacci retracement is to measure the extent of a price move and then calculate potential retracements based on the Fibonacci sequence of numbers.
The Fibonacci 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, etc.). Traders use these numbers to calculate potential retracements by looking for levels where the price may retrace (or pull back) before continuing in the original direction.
To use Fibonacci retracement, traders start by identifying a major price move (usually a trend) and drawing a horizontal line at the highest and lowest points of that move. They then divide the vertical distance between those two points by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8%, and 100%. These levels indicate potential retracement levels where the price may pause, correct, or reverse.
Here is an example of how to use Fibonacci retracement in practice:
– Identify a major price move, such as a uptrend in a stock’s price.
– Draw a horizontal line at the highest and lowest points of that move.
– Divide the vertical distance between the two points into key Fibonacci ratios, such as 23.6%, 38.2%, 50%, 61.8%, and 100%.
– Wait for the price to reach one of those retracement levels and see if it shows signs of support or resistance.
Frequently Asked Questions about Fibonacci Retracement:
Q: Can Fibonacci retracement work on all markets?
A: Yes, Fibonacci retracement can be applied to any market that has significant price moves, such as stocks, currencies, commodities, and indices.
Q: What is the significance of the Fibonacci ratios used in retracement levels?
A: The Fibonacci ratios are based on the mathematical relationship between the numbers in the Fibonacci sequence. These ratios are believed to have natural properties that create potential retracement levels.
Q: Should I always use Fibonacci retracement in my trading?
A: Fibonacci retracement is just one of many technical analysis tools that traders can use to analyze markets. Its effectiveness depends on a number of factors, such as the degree of market volatility, the length of the trend, and the strength of other indicators.
Q: Can Fibonacci retracement predict the future direction of a market?
A: No, Fibonacci retracement cannot predict the future direction of a market. It is a tool that helps traders identify potential levels of support and resistance based on past price moves.
In conclusion, Fibonacci retracement is a simple but powerful tool that can help traders identify potential levels of support and resistance in a market trend. By understanding the basics of Fibonacci retracement and its use in technical analysis, traders can make better-informed trading decisions and improve their chances of success.
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