What is Fibonacci Retracement?
Fibonacci retracements is an In technical analysis technique used to predict the support and resistance levels of a commodity. They are created by taking two extreme points, for example, the market peak and the peak low on the chart and dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8%, and 100%.
Why is it used
Fibonacci retracement levels are used to provide points of interest for traders while they use the bounce strategy. If a trader wants to buy, they watch for the price to stall at a Fibonacci level and then bounce off that level before buying. Bounce strategy is used to take advantage of the price action that occurs in conjunction with the moving averages. Knowing the bounce strategy exists, trader use the Fibonacci retracements to predict bounce levels and use these to gain a larger profit margin. As we all know prices don’t move up or down smoothly. They normal retrace back or up before continuing in there trend direction. This retracement is what traders are searching for to ensure they can maximise profit or getting into a position at a cheaper rate. In short, traders tend to watch for the price to stall at a Fibonacci level and then bounce off that level before buying.
Fibonacci is popular with traders because it is believed that Fibonacci ratios behave as the support, and or resistance. This would, in turn, provide the trader with guidelines to follow when placing a trade. On the other hand, Fibonacci retracements are not used to predict the future trends of a market due to them relying on the current trends to provide accurate readings. Fibonacci projects the direction of the current trends and provides limits. Without using other indicators you will not be able to know if the support will hold or f there will be a mini pullback, which will lead the price to break that retracement and make the previous support level the new resistance. Like all indicators, you must use more than one to be sure that the signal being provided are trustworthy.