Fibonacci Retracement for dummies

[Husires]

Disclaimer: The information's contained in this explanation is the result of my understanding of Fibonacci Retracement and may contain some errors. Search and confirm about it.

Table of contents

      1. What is Fibonacci retracement?
      2. How to use Fibonacci retracement
      3. The Difference Between Fibonacci Retracements and Fibonacci Extensions
      4. Limitations

Source: https://www.moneycontrol.com/news/business/markets/technical-classroom-how-to-use-fibonacci-retracement-levels-in-stock-trading-4150161.html

What is Fibonacci retracement?

We talked about in the last article Elliott Waves, and today we will start learning what you can expect when the market begins with a corrective phase, one of the most important tools that we will learn is how to use Fibonacci retracement.

It is about using Fibonacci ratios as percentages to predict areas of interest. These ratios are:
0%
23.6%
38.2%
61.8%
78.6%
100%
It is not fixed percentages, as percentages higher than 100% such as 261.8% or 423.6% can be used.

The important point that we will be looking for is 50%.


How to use Fibonacci retracement

If we take into account that the Fibonacci series are numbers

1, 1, 2, 3, 5, 8, 13, 21, 34, 55, etc.

If you divide a number by the number that follows it, you will get a percentage close to 0.61, and if we take the number that precedes it, we get 0.38, and thus it can be used to chart levels within the range if we put two important price points, and then this range is drawn according to the basic trend.

Hence some type of price movement is expected, either a reversal or a break.


Suppose the price rises from $20 to $35, and you want to draw the retracement indicator.

23.6% level will be (35- (15*0.236)) = $31.46
50% level will be (35- (15*.5)) = $27.5
61.8% level will be (35- (15*.618)) = $25.73


we can use it on charts as 5-wave move on the chart of the S&P 500 (Wave 2 flat. Wave 4 zigzag)

Source: https://comparic.com/learn-apply-fibonacci-retracements-trading/

Source: https://comparic.com/learn-apply-fibonacci-retracements-trading/

The Difference Between Fibonacci Retracements and Fibonacci Extensions

Fibonacci retracements apply percentages to a pullback
Fibonacci extensions apply percentages to a move in the trending direction


if the price rise from  $5000 to $10,000 then back to 6000. the move from 10,000 to 6000 is retracements and rally to 14,000 is extension.


Limitations
Although it indicates where the price might find support or resistance, there is no certainty of that, so the price may reverse or bounce back. Therefore, it should be used in conjunction with other technical indicators and should not be relied upon entirely.

Sources

Code:

https://www.investopedia.com/terms/f/fibonacciretracement.asp
https://comparic.com/learn-apply-fibonacci-retracements-trading/

[jackg]

I didn't know where the 0.618 actually came from (thought it was something to do with the sequence but) the 34/55 =0.618 is quite nice....

It's a bit like the rsi for me or the fear and greeted index as they can't all be used together but can support other basic TA patterns.

[nelson4lov]

Fibonanci retracement tools is part of the technical analysis tools in my trading toolbox. While I do know about how the  series and percentages come to play, I don't bother much about doing the calculations such as this:

23.6% level will be (35- (15*0.236)) = $31.46
50% level will be (35- (15*.5)) = $27.5
61.8% level will be (35- (15*.618)) = $25.73

Instead, I use the Fibonanci tool in tradingview and then I simply identify swing high and swing low points to draw the retracement levels.

Fibonanci retracement tools is a very handy tool as it helps me identify possible entry and exit points. It can also be used as support and resistance and when a lot of traders are usually the tools, those fib retracement levels usually become self-fulfilling prophecies.  Nonetheless, I use it with other TA tools like trendlines / channels. I don't really use the fibonanci extensions as much as I use the retracement levels. I was wondering if there's anyone that uses it actively?

[actmyname]

I didn't know where the 0.618 actually came from (thought it was something to do with the sequence but) the 34/55 =0.618 is quite nice....

1 / 1.618 = 0.618

When you solve the quadratic equation x² - x - 1 = 0, you get [1 +- sqrt(5)]/2, of which the positive gives you the golden ratio. And obviously, since 1.618 is the multiplier for ascending terms, the other direction would give you the reciprocal.

[palle11]

Something about Fibonacci is that it is also like those indicators that disappoints. Most times I feel it gets beaten by price easily. I use it as support or resistance with other indicator for better trading.

[jackg]

I didn't know where the 0.618 actually came from (thought it was something to do with the sequence but) the 34/55 =0.618 is quite nice....

1 / 1.618 = 0.618

When you solve the quadratic equation x² - x - 1 = 0, you get [1 +- sqrt(5)]/2, of which the positive gives you the golden ratio. And obviously, since 1.618 is the multiplier for ascending terms, the other direction would give you the reciprocal.

The negative gives −0.61803398874989484820458683436563811772 too...

And yeah the reciprocal is 0.618.

[GreatArkansas]

Something about Fibonacci is that it is also like those indicators that disappoints. Most times I feel it gets beaten by price easily. I use it as support or resistance with other indicator for better trading.

I am also using it too for identifying some pullbacks (short or long).
Fibonacci is really good tool for identifying your target too and possibly re enter or catching some dumps to enter (if you are fan of entering during dump, like catching some knives).
As a trader, using Fibonacci Retracement is useful, I remember when first time I saw and tried this, it really confusing, especially if you are not familiar what is Fibonnaci is or how it works in general, that's why it's important we should also know the origin of it or how it works in general, not only in charts.