THE FIBONACCI RETRACEMENT THEORY
The Fibonacci Retracement Theory is a series of techniques that are used to measure the support and resistance levels in a chart. It is used to identify potential pullbacks, reversals, and have proven to be an effective tool for making trading decisions. Here, we will discuss what this theory is, and how to use it for trading.
The Fibonacci Retracement Theory uses the Fibonacci sequence to help identify the areas of support and resistance levels in a chart. The Fibonacci sequence is a sequence of numbers that starts with 0 and 1 and each successive number is the sum of the two previous numbers. For example, 1+ 0 = 1, 1+1=2, 2+1=3, 3+2=5 and so on.
As a bookkeeping note, the Fibonacci sequence is more accurately known as the Fibonacci series. We will refer to it as the Fibonacci sequence in this article, as this is a more commonly recognizable term.
When using this theory, a trader attempts to identify potential reversals using the Fibonacci sequence. The Fibonacci sequence is applied in a chart by measuring the high and low of a chart and then breaking down the chart using the Fibonacci sequence.
The most common levels used in Fibonacci retracement are the 23.6%, 38.2%, 50%, 61.8%, and 100% levels. The 23.6% level is used to mark potential reversals, the 38.2% level is used to identify potential reversals, the 50% level is used to identify potential pullbacks, and the 61.8% level is used to identify potential pullbacks.
When looking at a chart, a trader should look for price action at the Fibonacci levels to identify potential support or resistance. Prices will often pull back or bounce off the Fibonacci levels and provide the opportunity for a trader to enter the market.
The Fibonacci Retracement Theory can be used in all types of markets and on all time frames. However, it is most commonly used in Forex and other financial markets.
When traders are using the Fibonacci retracement theory, they should be aware of the risks and rewards associated with any trading strategy. Trading is a risky endeavor and traders should only risk money that they are prepared to lose. Trading losses can occur, resulting in financial losses, so it is important to carefully consider the risks before entering any trades.
In conclusion, the Fibonacci Retracement Theory is a powerful tool for identifying potential pullbacks, reversals, and other market movements. By understanding the Fibonacci sequence and its application in a chart, traders can use it to their advantage in order to make informed trading decisions. However, as stated above, all trading carries risk, so traders need to be aware of the risks and rewards associated with this strategy before using it.
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