The Fibonacci retracement indicator is a technical analysis tool that is commonly used in forex trading to identify potential levels of support and resistance. It is based on the idea that markets will retrace a predictable portion of a move, after which they will continue to move in the original direction.
The Fibonacci retracement levels are derived from the Fibonacci sequence and are represented by horizontal lines that run parallel to the price axis. The levels are calculated by finding the high and low points of an asset’s price action and dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8%, and 100%.
Traders use Fibonacci retracement levels to identify potential levels of support and resistance and to make predictions about future price action. For example, if an asset’s price has been rising and reaches a key Fibonacci retracement level, traders may expect the price to experience resistance at that level and potentially reverse direction. Similarly, if an asset’s price has been falling and reaches a key Fibonacci retracement level, traders may expect the price to experience support at that level and potentially reverse direction.
It’s important to note that Fibonacci retracement levels are not a guarantee of future price action and can be subject to false signals and divergences. Traders should use the Fibonacci retracement indicator in conjunction with other forms of analysis, such as price action and market sentiment, to make informed trading decisions. Additionally, traders should be aware of the limitations of the Fibonacci retracement indicator and use other indicators or technical analysis techniques to confirm signals generated by the indicator.