Fibonacci Retracement is a popular tool used by traders and analysts in the financial markets to identify potential levels of support and resistance. It is based on the Fibonacci sequence, a series of numbers where each number is the sum of the two preceding ones.
The key Fibonacci retracement levels are 23.6%, 38.2%, 50%, 61.8%, and 100%. These levels are drawn on a price chart after a significant price movement, with the aim of predicting potential reversal areas. The idea behind Fibonacci retracement is that price tends to retrace a predictable portion of a prior move before continuing in the original direction.
Traders use Fibonacci retracement levels to decide where to enter or exit trades. For example, if a stock is moving higher and then retraces to the 38.2% level, a trader might see this as a buying opportunity, expecting the price to bounce back up from that level. Conversely, if a stock is declining and bounces back to the 61.8% level, a trader might interpret this as a chance to sell, anticipating a continuation of the downtrend.
It's important to note that Fibonacci retracement levels are not always accurate and should be used in conjunction with other technical analysis tools and indicators for confirmation. However, many traders find Fibonacci retracement to be a valuable tool in their decision-making process.
In conclusion, Fibonacci retracement is a technical analysis tool used in finance to identify potential levels of support and resistance based on the Fibonacci sequence. By recognizing these key levels, traders can make more informed decisions about when to enter or exit trades.
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