Fibonacci retracementis one of favorite tools applied by technicians when analyzing a market.
Fibonacci or Leonardo Pisano Bigollo was an Italian mathematician in Middle Age.
Fibonacci is famous for introducing the Hindu-Arabic numeral system in Europe, mainly by means of his book the Liber Abaci, Book of Calculation, in the early 13th century and for a sequence of number called Fibonacci numbers.
From this Fibonacci numbers now we see what technicians call as Fibonacci retracement.
Fibonacci retracement consists of some ratios derived from Fibonacci numbers, they are 0%, 23.
6%, 38.
2%, 50%, 61.
8%, 76.
4% and 100%.
These ratios used to predict any market correction after a certain movement; these can be upwards and downwards movements or bullish and bearish trend.
Let's say GBP/USD currency pair has moved downwards from 1.
5000 to 1.
4800 in a day.
After such long movement (200 pips), it is natural for the market to make a correction which normally the price will bounce back or retrace to 50% of Fibonacci retracement target, in this example the price will bounce back upside to 1.
4900, that is 100 pips above 1.
4800.
Now we have two signals: market trend is bearish and the price has retraced 50% of its previous movement.
It is a good opportunity for us to sell the currency pair at that level.
Usually, the price will try to retest the previous low at 1.
4800.
Profitable opportunity, isn't it? 100 pips downwards possibility to catch.
As a good trader, you should always bear in mind on stop loss level.
In the above example, you know where to place the stop loss level.
You are right, it should be placed a slightly pips above the 50% Fibonacci retracement level i.
e.
at 1.
4900 or so.
Besides that 50% level, the most common retracement or correction targets in any markets are 38.
2% and 61.
8%, it depends on the power of market trends.
By now, you already know how to properly use this tool to spot any good opportunity in any markets you want to trade.
Fibonacci retracement can be used for every market such as forex, commodity or stock market.
In addition, although at a glance, it is simple to use but to give you a better accuracy and more profitable trading set-up it will be great if you also study the basic knowledge of Elliot Wave Principle as the wave theory was derived from Fibonacci mathematics.
When you can master both techniques, you'll likely be the winner in most trade in any markets.