What Is Fibonacci Retracement?
The Fibonacci Retracement strategy which has been derived from the famous mathematical concept, of the Fibonacci sequence involves Identifying specific levels such as 23.6%, 38.2%, 50%, and 61.8%. All these levels can be used during an uptrend or a downtrend to identify points of potential reversal; furthermore, these levels can also be used to identify levels of support and resistance.
How to Apply Fibonacci Retracement
First and foremost, the Fibonacci replacement strategy can be implemented during an uptrend or a downtrend. Secondly, the beginning and end of the up or down trend should be marked by horizontal lines to represent these levels. The Fibonacci tool is drawn on these two marked levels and the various Fibonacci levels can then be seen. All these levels showcase points of potential reversal.
For example, if a particular asset rises from $100 to $120 in a bullish move, the Fibonacci retracement strategy can then be implemented using $100 as the beginning and $120 as the end of the move. After the Fibonacci tool has been properly implemented various Fibonacci levels will be visible. Traders then get an insight as to what levels from which the price might reverse if the bullish move continues.
Why Fibonacci Retracement Matters
While traders may have different approaches regarding how they trade the markets, adding the Fibonacci retracement strategy to their arsenal will almost always be a blessing. As previously mentioned, the most important use of the Fibonacci retracement tool is to identify areas of potential reversal, but this tool can also be used by traders in building bulletproof stop losses. These bulletproof stop losses can be created by simply placing the stop loss above or below the Fibonacci level.
Traders making use of the Fibonacci retracement strategy by combining them with other forms of technical analysis have a higher probability of their trades succeeding. For best results, traders should use the Fibonacci retracement strategy as an additional level of confidence behind their bias on the market.
Common Pitfalls in Using Fibonacci Retracement
While the Fibonacci retracement strategy is an extremely effective strategy, traders often make three glaring mistakes when it comes to this method.
The first mistake is by blindly trusting the Fibonacci retracement levels and entering their trades based on them.
The second mistake made by traders is by constantly adjusting the Fibonacci tool until the Fibonacci levels exactly match with previously drawn key levels. This leads to a false sense of confidence behind their trades.
The third mistake made by traders is by ignoring market conditions, for instance the market could be extremely volatile and prone to making big powerful moves. In such cases the momentum of the market has a much higher tendency of simply breaking past and ignoring these Fibonacci levels.
As previously mentioned, it is important to combine the Fibonacci retracement strategy with other forms of technical analysis while keeping market conditions in mind.
The Talented Trader supports The Fibonacci Retracement Strategy.
The Talented Trader promotes trading methods and techniques that have stood the test of time and proven themselves as reliable and consistent. The logic behind this strategy is deeply ground in mathematics and statistics and thus traders can trade with an additional level of confidence. Traders looking to upskill their trading in the Fibonacci Retracement strategy or other trading techniques can utilize the immense number of resources provided by The Talented Trader.
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