In this week’s strategy video, David Jones and Trading 2 & 2 cover Fibonacci retracements. Jones admits he’s not a big fan but explains the theory behind it and shows how it can be used on gold in a real market. Fibonacci numbers occur in nature, and the assumption is they’re like hidden levels of support in an uptrend or hidden levels of resistance in a downtrend. The strategy involves looking at four key levels: 23.6%, 38.2%, 50%, and 61.8%. If the market drops back more than 61.8% at the prior move, it’s going to go all the way back to where the move started.

Is Fibonacci Retracement a reliable tool for market analysis?

Introduction: Understanding Fibonacci retracements and their origins

Fibonacci retracements take their name from an 11th-century mathematician named Leonardo Fibonacci, who created the Fibonacci sequence. Investors and traders use these retracements to identify potential levels of support and resistance in a market trend. While some traders swear by Fibonacci retracements, others remain skeptical. In this article, we will examine the origin of Fibonacci retracements and their theoretical application. We will also analyze historical and current data on gold to determine their effectiveness.

The Fibonacci sequence and its properties

The Fibonacci sequence is formed by starting with two ones, and every subsequent number is the sum of the previous two. The series continues indefinitely, with the next ten numbers being 55, 89, 144, 233, 377, 610, 987, 1597, 2584, and 4181. These numbers possess certain mathematical properties, including their relationship to succeeding numbers. Any number divided by the next number in the sequence tends towards 0.618, any number divided by the second number ahead tends towards 0.382, and any number divided by the third number ahead tends towards 0.236.

Fibonacci retracement levels

Chartists use these properties to create Fibonacci retracement levels, which are expressed as percentages. These levels include 23.6%, 38.2%, 50%, and 61.8%. Investors and traders use these levels to identify potential levels of support and resistance in a market trend. For instance, if a market is trending upward and then experiences a decline, investors may look for support at the Fibonacci retracement levels mentioned earlier. If the retracement does not hold, the market could continue to decline.

Applying Fibonacci retracements in a theoretical market scenario

The theory behind Fibonacci retracements is that they can reveal hidden levels of support and resistance in a market trend. Suppose a market is moving higher, and then it starts selling off. In that case, Fibonacci retracements will attempt to identify how far back the market will fall before it resumes its trend. Suppose the market initially rose 100 points. In that case, investors would look for support at the 23.6% retracement level (23.6 points), the 38.2% retracement level (38.2 points), the 50% retracement level (50 points), and the 61.8% retracement level (61.8 points).

Historical data analysis: Using Fibonacci retracement on gold

We can analyze gold price data to see how effective Fibonacci retracements are in determining levels of support and resistance. Suppose we take a look at the end of February in a particular year. The gold price was initially around $1,120 per ounce and rose to around $1,260 per ounce at its highest point. It then started to decline, and we can apply the Fibonacci retracements to see where it might find support. We would first draw a line from the low of $1,120 to the high of $1,260 to obtain our retracement levels.

On this particular chart, the 23.6% retracement level was at $1,237, the 38.2% retracement level was at $1,209, the 50% retracement level was at $1,184, and the 61.8% retracement level was at $1,157. As the market began to decline, the retracements were broken one by one. Finally, the market found support at the 50% retracement level, holding steady until it resumed its upward trend.

Current data analysis: Applying Fibonacci retracement on gold

A more recent example could be from today’s gold price where the 23.6% retracement level is at $1,826.2 per ounce, the 38.2% retracement level is at $1,794.5 per ounce, the 50% retracement level is at $1,779.9 per ounce, and the 61.8% retracement level is at $1,765.2 per ounce. As of the writing of this article, the gold price is hovering around the 38.2% retracement level. In this case, the retracements have managed to provide relative support for the market.

Conclusion: The effectiveness of Fibonacci retracements for market analysis

Fibonacci retracements are a useful tool for investors and traders looking for potential levels of support and resistance in a market trend. Although some remain skeptical about their effectiveness, the retracement levels can provide significant insights into how the market will behave. Our analysis of historical and current gold prices shows that these retracements provide support for the market in some cases, but not in others. As with any market analysis tool, it should not be relied on exclusively, and investors should incorporate other technical and fundamental analysis methods when making decisions.