Fibonacci retracement is named after the mathematician Leonardo Fibonacci, who developed a sequence of numbers that contain ratios that have come out as one of the most important tools in the field of stock analysis.

Fibonacci retracement is a term used in technical analysis to refer to areas of support or resistance. Fibonacci retracement levels use horizontal lines to indicate where possible support and resistance levels are. Each level is associated with a percentage. The percentage is how much of a prior move the price has retraced. The Fibonacci retracement levels are 23.6%, 38.2%, 61.8% and 78.6%. While not officially a Fibonacci ratio, 50% is also used.

While Fibonacci retracements apply percentages to a pullback, Fibonacci extensions apply percentages to a move back in the trending direction. For example, a stock goes from Rs.500 to Rs.1000, and then back to Rs.750. The move from Rs.1000 to Rs.750 is a retracement. If the price starts rallying again and goes to Rs.1600, that is an extension.

Fibonacci retracement is named after the mathematician Leonardo Fibonacci, who developed a sequence of numbers that contain ratios that have come out as one of the most important tools in the field of stock analysis.

The Fibonacci’s sequence is 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89…and so on. Certain ratios reoccur within these numbers. The ratio of approximately 61.8%, termed as the ‘Golden Ratio’ ‘φ’, is created by dividing a number in the sequence by the number that follows, here’s an example: 8/13 = 61.53%, 34/55 = 61.81%, 55/89 = 61.79% etc. The main Fibonacci retracement ratios or retracement levels used by technical analysts are 23.6%, 38.2%, 50%, 61.8% and 100%. While not an official Fibonacci ratio, 50% is also used as one of the retracement levels.

The indicator proves itself as a useful one, as it can be drawn between any two significant price points, such as a high and a low, and then the indicator is going to create the levels between those two points.

If the price rises to Rs.1000, and then drops to Rs.236, it has retraced 23.6%, which is a Fibonacci number. Fibonacci numbers are found all over the nature, and therefore many traders are of the belief that these numbers have significant relevance in the financial markets.

Unlike moving averages, Fibonacci retracement levels are static prices that do not change. The static quality of the price levels enables quick and easy identification. Fibonacci retracements can be used in order to place entry orders, to calculate stop loss, or to set price targets. Let’s learn with an example, a trader sees a stock moving higher. After a move up it retraces to the 50% level, and then starts to move up again. Since the bounce occurred at a Fibonacci level, and the longer trend is up, the trader decides to buy. He could set a stop loss at the 61.8% level, or at 78.6% level, or the 100% level (from where the move began).

If the Fibonacci calculator is used with Elliot Waves, it can generate remarkable results. A trader could use these levels or ratios to find high probability trades with very small stop loss.

You may also use these ratios to find Elliott Waves extensions and to book profit near those levels. For Elliot Wave experts, Fibonacci calculator is a highly useful tool that can assist them in calculating Fibonacci extension and retracement levels for the market price.

In any market (bullish or bearish), the corrections usually end near the golden ratio or one of the other Fibonacci retracement levels. The extensions are often used in order to find next impulse targets.

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