Fibonacci Retracement
The Fibonacci Retracement tool is a very common drawing tool used by those who trade stocks, Forex, futures and commodities with technical analysis. It measures the percentage that a market has retraced against an original trend.Fibonacci trading is very popular and the numbers used come from the Fibonacci sequence which is a series of numbers where each number is the sum of the previous two numbers before it.
This sequence of numbers is commonly attributed to Leonardo of Pisa (he was referred to as “Fibonacci” which means “son of Bonaccio”) however the number sequence was known and used well before him in India. Some feel these numbers have significant meaning because the stucture of many biologicial systems are organized according to these numbers.While that is true, some question whether that fact has any relevance to the financial markets.Whether it does or not, many day traders, swing traders and investors use Fibonacci retracements, so if nothing else the numbers, and the levels they create, at the very least provide a self-fulfilling prophecy through the sheer use by so many traders and therefore carry significance in the markets.
While Fibonacci levels (or “Fib” levels as traders often call them) have proven to be effective in trading, they should not be used alone.
Fibonacci retracement levels only measure one thing: support/resistance levels. However, knowing which of the Fibonacci levels is going to be the final support/resistance level before the market continues to move back in its original trend, cannot be determined by Fib levels alone.
For that, other technical analysis techniques must be used along with Fibonacci trading: Cycles, momentum, and fractals are all “energies” in the charts that are helpful to measure along with the Fibonacci retracement levels.
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