Fibonacci Retracement is a leading indicator that is used to predict future price movement of a stock, index, commodity or currency pair. This indicator can be used in different trading markets such as stocks, ETFs, futures, commodities and forex. Well what is Fibonacci and how does it work?
Fibonacci Retracement was discovered by Leonardo Fibonacci in the 12th century. Leonardo realized a proportion in the building blocks of nature. The Golden rule, as it’s called, is the proportion of things in the larger picture. Fibonacci Retracement says out of a larger movement the price will retrace a certain percentage of that larger move before continuing in the original direction. The mean for those percentages is 61.8%. This number is the Golden Rule.
The proportion Leonardo figured out was that 61.8% of the distance between your head and your feet is your belly button. Your elbow rests at the 61% proportion of your total arm distance. In a beehive the bees consist of 61% males to females. The list goes on and on. How can we use this to trade? We can use it in trading markets because these same proportions exist there as well.
The goal is to find a large movement. Large meaning a definite high and low point. You can use Fibonacci almost as well on smaller chart time frame. We only say almost because the larger the time frame the more reliable most signals and strategies are.
So, here we have found our high and low point. Then we will need to high and low value in the calculator. Say our movement is upward, so put the low in the first point and the high in the secong point. It will now automatically calculate the points at 50% retracement. This is 50% of the larger movement. 50% retracement means if the price retraces back to that line it has retraced 50%. There are other points and proportions calculated automatically as well; 38.2%, 61.8%, 78.6%, retracements. There are several other retracement percentages, but these are the ones that are predominantly utilized in trading.