A Fibonacci retracements is quite a common indicator many traders use for analysing the market. They help traders determine where the support and resistance of an asset will likely be.
Origins of Fibonacci retracements
This indicator, quite appropriately, has its origins in the Fibonacci sequence. Every number is the sum of the two numbers it follows. If you don’t remember how it looks, here’s a quick reminder:
0, 1, 1, 2, 3, 5, 8….
The retracements come from comparing the proportion of one number against the numbers following it. These numbers are more established the furhter you go along in the sequence. So in sequence they would be: 61.8, 38.2, 23.6. You would then subtract these from 100 and end up with new numbers. These would be 23.6, 38.2, 61.8, 76.4.
How this is relevant
These fibonacci retracement levels are vitally important. Generally, traders believe that these are the rough levels that trends fall back to roughly these levels. So, after an asset reaches say the support, it will then gain 23 percent of the losses and eventually 76 percent. These levels help expose where the most likely areas for trading will be. However, you should be careful on where you put your points of comparison. Not everyone will have guessed that a swing starts and ends at the same point. This is why its is best to keep an eye on all the swing if you can.
Some caveats for Fibonacci retracements
These are only rough estimations for where the retreats will land. They are quite accurate estimates, but estimates nontheless. Keep in mind also that the prices are not bound to keep following the general pattern. They could reverse, or just stay stable at one of these points. You will not see the same pattern every time.
The best way to use Fibonacci retracements are as tools for many different swings. They indicate where the price will most likely go and help you spot patterns.