A tool used by technical traders can be used to distinguish retracements from reversals in the market. A Fibonacci retracement tool can help you find entries, set a take profit, and a stop loss.
Swing highs and swing lows. A point in the market when price reverses and goes in the other direction. There is an indicator of the same name that highlights these points in the market.
A term used to describe the overall change in market direction.
An order you set with your broker to close out your trade if price goes in the opposite direction and hits your pre-determined exit price.
An order you set for your broker to close your trade once your pre-determined exit out of the market is reached.
The study of price action and market structure to form a prediction of which direction the market will move in based on candlestick patterns and previous data.
Uptrend is a rise in price which describes the direction in which the market is heading. When price is in an uptrend you will see it make higher highs and higher lows.
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The Fibonacci tool is one of the best tools used in technical analysis but also can be one of the most confusing. There’s a golden ratio by dividing two numbers to get a third and then divide the last with the previous number to get the levels of the Fibonacci retracement tool. The main thing fibonacci is trying to tell us is that everything moves in a geometrical pattern. For example:
1+1 = 2. 1+2 = 3. 2+3 = 5. 3+5 = 8. 5+8 = 13, etc.
Essentially if you divide 8/13 (numbers closest to each other), it’ll equal close to or exactly 61.8
Essentially if you divide 5/13 (numbers alternate to each other), it’ll equal close to or exactly 38.2
Must you know the calculations in order to use this tool? Nope. It’s already there for you to use, you just need to understand how to apply it to the charts and tie it together with your strategy.
This tool is a great addition to identifying retracements vs reversals within a trend. Beyond that, it can assist you in determining your entry, stop-loss, and take profit! The levels of the Fibonacci Retracement tool are -27 extension, 0, 38.2, 50, 61.8 78.6, and 100. How does knowing this help? Glad you asked!
The -27 extension level can determine where price will go after retracing, so what does that give you? You take profit when using Fibonacci!
The 38.2, 50, 61.8 78.6 are your retracement levels where you will be looking for price to show signs of reversal for the end of the retracement. These levels will potentially give you your entry!
Now, if price continues past the 78.6 level into the 100, it is no longer considered a retracement but a reversal.
Before using this tool, you want to identify the swing high and swing low. Between these two are levels price can retrace to before continuing in the direction of the trend. The Fibonacci tool will then identify these levels by using horizontal lines. These levels will be a percentage between 0 and 100. The way it works is by the trader being able to decipher which level price may reverse off of by using price action. The lower the level, the faster and more stronger price will burst. You cannot use this tool as the sole source of confirmation; as it is simply another confluence. Below, I will give an example of how the Fibonacci tool is used in a trend.
How to place the Fibonacci tool?
In a DOWNTREND you want to drag it from top to bottom. That will have the 100 level at the swing high, and 0 at the swing low. You will need to see a pullback to identify the swing low.
In an UPTREND you want to drag it from bottom to top. That will have the 100 level at the swing low, and the 0 at the swing high.