Fibonacci Retracement/Extensions- How & Why? | Live Example
Fibonacci retracements in technical analysis of various assets use a mathematical sequence discovered by Italian mathematician Leonardo Fibonacci. This sequence is a series of numbers where each number is the sum of the two preceding ones: 0, 1, 1, 2, 3, 5, 8, 13, 21, and so on. In stock trading, Fibonacci retracements are used to identify potential levels of support or resistance during price corrections.
Imagine you have a stock that has been rising in price for some time. Suddenly, it starts to decline. Traders who use Fibonacci retracements believe that during this downward movement, the stock price will likely retrace or bounce back to certain levels before continuing its downward trend.
These retracement levels are derived from the Fibonacci sequence. The most commonly used levels are 38.2%, 50%, and 61.8%. For example, if a stock's price drops from 100 to 80, traders would expect it to bounce back to around 88.20 (38.2% retracement), 90 (50% retracement), or 93.20 (61.8% retracement) before continuing its decline.
While their effectiveness is debated just like any other tool, many traders including myself believe that these levels act as psychological support or resistance points due to the large number of market participants who follow this approach.
Let us get back on the example above.
I drew a trendline which had helped me back in 2021 to predict the top in GOLD. This is the perfect example of how EVERY PRICE movement matters. The Fibonacci levels are derived from levels from 2008. In this example the Fibonacci extension level 3.618 held as a perfect resistance for the price of GOLD.
2008 to 2023, isn't this amazing? How long can a single price movement can have its affect!
How to draw a Fibonacci Retracement/Extension?
It's fairly simple. Just plot one end of the fib to the high of the price movement and the other to the low or vice versa.
I'll answering all your queries in the comments below. Please feel free to reach out!
Imagine you have a stock that has been rising in price for some time. Suddenly, it starts to decline. Traders who use Fibonacci retracements believe that during this downward movement, the stock price will likely retrace or bounce back to certain levels before continuing its downward trend.
These retracement levels are derived from the Fibonacci sequence. The most commonly used levels are 38.2%, 50%, and 61.8%. For example, if a stock's price drops from 100 to 80, traders would expect it to bounce back to around 88.20 (38.2% retracement), 90 (50% retracement), or 93.20 (61.8% retracement) before continuing its decline.
While their effectiveness is debated just like any other tool, many traders including myself believe that these levels act as psychological support or resistance points due to the large number of market participants who follow this approach.
Let us get back on the example above.
I drew a trendline which had helped me back in 2021 to predict the top in GOLD. This is the perfect example of how EVERY PRICE movement matters. The Fibonacci levels are derived from levels from 2008. In this example the Fibonacci extension level 3.618 held as a perfect resistance for the price of GOLD.
2008 to 2023, isn't this amazing? How long can a single price movement can have its affect!
How to draw a Fibonacci Retracement/Extension?
It's fairly simple. Just plot one end of the fib to the high of the price movement and the other to the low or vice versa.
I'll answering all your queries in the comments below. Please feel free to reach out!
Indian Stock Market trader & trainer. Believer that everything revolves around price of an asset and nothing else.
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