Fibonacci retracement is a popular technical analysis tool used by traders to identify potential levels of support and resistance in financial markets. It is based on the idea that prices tend to retrace a predictable portion of a move, after which they may continue to move in the same direction. The retracement levels are calculated using ratios derived from the Fibonacci sequence, a mathematical sequence in which each number is the sum of the two preceding numbers.
To use Fibonacci retracement, traders start by identifying a significant move in the market, such as a recent uptrend or downtrend. They then draw a trendline from the beginning of the move to the end of the move, and the retracement levels are drawn based on the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8%, and 100%.
These levels are then used to identify potential levels of support and resistance, where prices may retrace before continuing in the original direction. For example, if a market has been in an uptrend and then retraces to the 38.2% level, traders may look for a buy signal, as the market is likely to resume the uptrend from that level.
Fibonacci retracement can be used in any financial market, including stocks, forex, and commodities. It is often used in conjunction with other technical analysis tools, such as moving averages, trend lines, and chart patterns.
One of the key benefits of Fibonacci retracement is that it provides traders with a clear set of levels to watch for potential trade opportunities. However, it is important to keep in mind that Fibonacci retracement is not a foolproof tool and should be used in conjunction with other technical analysis tools and risk management strategies to maximize its effectiveness.
There are several popular strategies that have developed out of Fibonacci retracements, including their vast use in Elliot Wave theory and Harmonics trading. One such popular strategy is the measure move approach.
The measured move trading strategy is a technical analysis tool that can be used by traders to identify potential price targets based on the size of a previous price move. The strategy is based on the idea that markets tend to move in repetitive patterns, and that the size of a previous move can provide a clue to the size of a subsequent move.
Next, traders look for a similar pattern to occur in the market, which they can use to identify a potential price target for the subsequent move. For example, if a market has previously moved up by $10, and then retraced by $2, a measured move strategy might suggest that the market will move up by another $10 once it has broken out of the retracement.
One common example of the measured move strategy is the "ABC" pattern from Elliot Waves. In this pattern, a market will make an initial move up or down (the "A" leg), followed by a retracement (the "B" leg), and then a second move in the same direction as the first move (the "C" leg). Traders can use the size of the A and B legs to project the potential size of the C leg.
For example, if the A leg of an uptrend is $10 and the B leg retraces by $2, a measured move strategy might suggest that the C leg will be roughly the same size as the A leg, or $10. This would imply a potential price target of $18 ($10 + $2 + $10).
The measured move strategy can be used in any financial market, including stocks, forex, and commodities. It is often used in conjunction with other technical analysis tools, such as trend lines, chart patterns, and support and resistance levels.
One of the benefits of the measured move strategy is that it provides traders with a clear price target to watch for, which can be used to set profit targets or stop loss orders. However, it is important to keep in mind that the strategy is based on historical price movements, and past performance is not necessarily indicative of future results. Traders should always use the measured move strategy in conjunction with other technical analysis tools and risk management strategies to maximize its effectiveness.