Fibonacci Retracements are points which are fractionally related to the immediately previous move, where frequently a stop and reversal will occur in the retracement of that move. These fractions are of course Fibonacci Ratios.
In order to calculate these ratios the move will need to be measured so it must have had its beginning at an identifiable point. This would be a main pivot for that time basis which is just one of those reversal points you can spot a mile away. Similarly the ending of that previous move must have also been clearly evident.
With those measurable pivots in place the total price travel of the move would be measured in pips. Then, marking the ratios of that travel from its end point will give locations to expect possible stop and reversal of the retracement. Most charting packages have Fibonacci Retracement tools which allow easy marking for the trader without doing the math.
The most common ratios used in trading for retracements are 23.6%, 38.2%, 50%, 61.8% and 76.4% with 38.2% and 61.8% holding the greatest weight with most technicians.
Often reversals will occur at a point near or on these calculated locations. That tendancy has been very soundly proven however any reliance on a particular one is not statistically dependable. Also while tending to bounce or pause at these areas the retracement will at times continue past them in due course.
These of course can be completely ignored by the market and a retracement reverses at some other point or no reversal takes place and instead of a retracement the entire previous move is overdone with a move in the complete opposite direction now shown.
Due to those unknowns other technical approaches are often combined for greater reliability.
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Articles in Forex Traders Glossary
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There are 96 articles in Forex Traders Glossary.
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Fibonacci Retracements
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