Fibonacci Retracements
Fibonacci retracements are lines drawn on candlestick charts that show likely points of support and resistance for a trade. The initial Fibonacci line needs to incorporate the whole trade being looked at. The starting point for the initial Fibonacci line in an upwardly trending market needs to be the lowest point of support and the end of the line needs to be the highest point of resistance. Once the initial Fibonacci line is in place the chart will then calculate the three Fibonacci levels. In an up trending market these lines can represent likely levels of support. The levels are automatically calculated at 38.2%, 50% and 61.8%. In a downward trending market the initial line begins at the highest point of resistance and ends at the lowest point of support with the calculations being automatically calculated once more. In a down trending market the levels represent possible levels of resistance.
Fibonacci retracements can be applied to any candlestick chart irrespective of time scale. It is worth remembering though that longer-term charts paint a more thorough picture of the market trend. Long-term trends also represent significant levels of investment with more traders likely to be involved than a short-term chart. Fibonacci retracements can be used on charts with a shorter time scale but the levels of resistance and support are based on such minor changes and fluctuations that it is difficult to deduce significant trending patterns from them.
A Fibonacci analysis of a current up trending market will show the possible points where the currency pair could fall to. Fibonacci analysis of a down trending market will indicate possible points for the currency pair to bounce back up to. Previous points of consolidation should lie on one of the Fibonacci lines; this can be used to check the Fibonacci line analysis. Should the currency pair then clearly break the 61.8% line then it is considered that the trend being analysed has been broken.
Fibonacci analysis is a popular form of trader analysis, because it is so popular many cynics are inclined to disbelieve the Fibonacci analysis and regard it as a self- fulfilling prophecy. There is an element of truth in this, as many traders see the candles reaching the predicted point of support they may place a buy order. Other traders seeing the line of support becoming stronger also buy at that point, making the support line even stronger. The same is true when the currency pair is going short. Traders place sell orders at points of possible retracements where the pair is likely to bounce back up to, many traders all selling at that point will fulfil the Fibonacci analysis. This shows that there is some weight in the self-fulfilling school of thought, however without those lines of support and analysis tools in the first place there would be no indication of when to place an order making the initial analysis still valid and accurate.
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