Fibonacci retracement levels help provide support and resistance price levels, the direction may be reversed, and can be used to determine entry levels. The retracement level is based on the previous movement of the market:
After the price has risen sharply, traders will measure the movement from bottom to top to find a position where the price can retrace, and then rebound high and continue to maintain the overall trend higher.
After the price has fallen sharply, the trader will measure the movement from top to bottom to find a position where the price can retrace, and then correct the low and continue to maintain the overall trend lower.
Before we learn how to use Fibonacci trading software and Fibonacci indicators to help identify these retracement levels, it can help you visually view the patterns shown below:
Fibonacci retracement pattern
Previously, we calculated the relationship between the Fibonacci series to determine some important Fibonacci ratios, such as 0.618 (which constitutes a 61.8% Fibonacci retracement level) and 0.382 (which constitutes a 38.2% Fibonacci retracement level) The basis of the retracement level).
Traders also use other Fibonacci trading ratios, such as 23.6% and 78.6%, etc. The four listed in the chart above are the most commonly used Fibonacci retracement levels.
Use the buy mode when the market is in an uptrend. The trader will try to find the range of price retracement X to A (low swing to high swing), and then find support and bounce back higher (B). These support levels are Fibonacci retracement levels, which may be the 23.6%, 38.2%, 61.8%, or 78.6% retracement levels from the X line to the A line.
Use sell mode when the market is in a downward trend. The trader will try to find the range of price retracement from X to A (high swing to low swing), and then find resistance and retreat to a lower (B). Point B can be any of the listed Fibonacci retracement levels.
How to trade Fibonacci extension levels
Fibonacci extension levels also help provide price levels of support and resistance, but are used to calculate how far the price may go after the retracement is complete. Essentially, if the Fibonacci retracement level is used to enter a trend, the Fibonacci extension level is used to determine the end of the trend.
1.618 is the key number in the Fibonacci sequence, which is why it is called the golden ratio. This forms the basis of the most popular Fibonacci extension level (161.8%).
Fibonacci trading software and Fibonacci retracement indicator
When using Fibonacci trading software, there are two different types of Fibonacci indicators that can help traders draw retracement and expansion levels.
Once the trader uses the Fibonacci tool to measure the distance from X to A, the software will divide the vertical distance by the Fibonacci ratio (23.6%, 38.2%, 61.8%, 78.6%, etc.) to draw Fibonacci Level. This means you don’t need to learn how to manually calculate Fibonacci retracements and extension levels, because the software will draw it for you-save a lot of time!