Fibonacci retracement levels are a form of chart analysis that allows you to predict where a stock or other asset may stop falling. Such levels are referred to as support, and are marked with a horizontal line on the chart. The most common Fibonacci retracement levels are 38.2 percent, 50 percent and 61.8 percent. In an uptrend, a price will move higher, fall back and move higher again. The Fibonacci retracement levels are calculated from the moves higher, with the percentages representing how much of the move higher will be retraced before continuing higher.
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Find a price high and price low. The low is a point where the price stopped dropping and then began to move higher. The high is a point where the price stopped rising and began to decline. Mark the low with an "A" and the high with a "B" to keep track of which high and low you are using.
Calculate the Fibonacci retracement levels. When price is moving in an overall upward direction, calculate the retracement by taking (B minus A) multiplied by F percent, and subtract this number from B. In the formula, F% is the Fibonacci percentage such as 38.2 percent or 50 percent. For example, if point A is $5 and point B is $10, and you want to find the 38.2 percent retracement level, plug the numbers into the equation. ($10-$5) x 0.382=$1.91. Subtract $1.91 from $10 to get the 38.2 percent retracement level of $8.09.
Draw horizontal lines for each level. If you are using a chart, draw horizontal lines on the chart to mark each Fibonacci retracement level. Label these lines with the appropriate percentage.
Repeat steps two and three for each of the main Fibonacci retracement levels —38.2 percent, 50 percent and 61.8 percent. Additional Fibonacci retracement levels include 76.4 percent and 23.6 percent, although these are less commonly used.
Use the Fibonacci levels for trading or analysis purposes. The most common usage of these levels is to predict potential areas of support. If the price pulls back to a Fibonacci level and then bounces higher off it, consider this a buy signal.
- Fibonacci retracements can be used in a downtrend. Label the high point A and the low point B. Use the formula (A minus B) multiplied by the Fibonacci percentage, and add this to B.
- Most charting platforms provide a Fibonacci retracement tool. In the platform, select the tool, then click on a price and drag the indicator down to the low price. All the Fibonacci levels will be automatically calculated for you.
- There is no guarantee that a pullback in price will stop at a Fibonacci retracement level. If the trend reverses it is possible Fibonacci retracement levels will have no effect on stopping the price at all.
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