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Fibonacci Retracement

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Fibonacci retracement is a technical analysis indicator that identifies support and resistance levels based on the Fibonacci sequence, a series of numbers generated by adding the previous two numbers in the sequence.

Formula:

The Fibonacci retracement is calculated by taking the ratio of the distance between a point and the previous low to the distance between the previous low and the previous high.

Fibonacci retracement = (Point - Previous Low) / (Previous High - Previous Low)

Interpretation:

  • A retracement of 50% indicates that the price has retraced back to the previous low.
  • A retracement of 38.2% indicates that the price has retraced back to the previous low by 38.2% of the distance from the previous high to the previous low.
  • A retracement of 23.6% indicates that the price has retraced back to the previous low by 23.6% of the distance from the previous high to the previous low.

Uses:

  • Identifying support and resistance levels
  • Predicting potential reversal points
  • Confirming trend direction
  • Determining the potential for retracement

Example:

In the chart below, the orange line shows the Fibonacci retracement of the price from the previous low to the current price. The green lines show the support and resistance levels based on the Fibonacci retracement.

[Image of a chart with a Fibonacci retracement]

Advantages:

  • Simple to use
  • Accurate identification of support and resistance levels
  • Can be used in any market
  • Can be used to confirm trend direction

Disadvantages:

  • Can be noisy in volatile markets
  • Can be difficult to identify the correct retracement level
  • May not be accurate in long-term trends

Additional Notes:

  • The Fibonacci retracement is a popular technical analysis indicator, but it should not be used in isolation. It is best to use it in conjunction with other indicators to confirm signals.
  • The Fibonacci retracement is not a perfect indicator, and there will be times when it does not work as expected.
  • It is important to remember that the Fibonacci retracement is not a forecasting tool. It can only be used to identify potential support and resistance levels.

Disclaimer

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