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Fibonacci retracements are often used by technical traders. These retracements are based on the key numbers discovered in the 13th century by a mathematician called Leonardo Fibonacci. 

A Fibonacci retracement is calculated in technical analysis by selecting two extreme points on a stock chart, often a peak and a trough. The key ratios of 23.6 percent, 38.2 percent, 50 percent, 61.8 percent, and 100 percent are then employed to divide the vertical distance.

How it Works 

0 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, and so on are the Fibonacci numbers. This series continues forever since each number is merely the sum of the two terms preceding it. One striking feature of this numerical series is that each number is about 1.618 times larger than the previous number. The cornerstone of the ratios employed by technical traders to predict retracement levels is the common relationship between each number in the series. 

Dividing one number in the series by the number that follows gives the essential Fibonacci ratio of 61.8 percent. 21 divided by 34 = 0.6176, while 55 divided by 89 equals about 0.61798.

The 23.6 percent ratio is calculated by multiplying one number in the series by the number three places to the right. Like for example 8 divided by 34 equals approximately 0.23529.

Predicting Stock Prices 

These Fibonacci ratios appear to have a role in the stock market, just as they do in nature, for unknown reasons. 

Fibonacci retracements are the most often utilised Fibonacci trading tool. This is owing in part to their relative simplicity as well as the fact that they may be used to almost any trading instrument. They may be used to draw support and resistance lines, place stop-loss orders, and create price targets. Fibonacci ratios can potentially be the driving force behind a countertrend trading strategy.

Fibonacci retracement levels are horizontal lines that show where support and resistance could be found. Each of the ratios or percentages relates to one of the levels. It demonstrates how much of a previous move the market has retraced.

The previous trend is expected to continue in the same direction. However, before that happens, the asset’s price normally retraces to one of the above-mentioned ratios. 

The top day trading firms can also help investors who are attempting to anticipate stock prices using Fibonacci retracements.

Pros and Cons 

The Fibonacci retracement is used at the discretion of the user. Traders can employ this technical indication in a variety of ways. Traders who profit using Fibonacci retracement attest to its efficiency. Those who lose money, on the other hand, claim it is untrustworthy. Others contend that technical analysis is a self-fulfilling prophecy. Price activity may reflect the fact that traders are all watching and employing the same Fibonacci ratios or other technical indicators. 

Any Fibonacci tool’s core premise is a numerical anomaly that is not supported by any logical proof. The Fibonacci sequence’s ratios, numbers, sequences, and formulae are simply the result of a mathematical process. That is not to say that Fibonacci trading is intrinsically untrustworthy. It can, however, be unsettling for traders who wish to grasp the reasoning behind a strategy.

Furthermore, a Fibonacci retracement approach can only indicate potential corrections, reversals, or countertrend rebounds. This approach has difficulty confirming other indications and does not generate immediately discernible strong or weak signals. 

Many traders are successful when employing Fibonacci ratios and retracements to place trades inside long-term market patterns. The Fibonacci retracement may be made even more powerful when paired with additional indicators or technical indicators.