Fibonacci retracement

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Fibonacci retracement levels shown on the USD/CAD currency pair
Fibonacci retracement levels shown on the USD/CAD currency pair. In this case, price retraced approximately 38.2% of a move down before continuing.

In finance, Fibonacci retracement is a method of technical analysis for determining support and resistance levels.[1] It is named after the Fibonacci sequence of numbers,[1] whose ratios provide price levels to which markets tend to retrace a portion of a move, before a trend continues in the original direction.

A Fibonacci retracement forecast is created by taking two extreme points on a chart and dividing the vertical distance by important Fibonacci ratios. 0% is considered to be the start of the retracement, while 100% is a complete reversal to the original price before the move. Horizontal lines are drawn in the chart for these price levels to provide support and resistance levels. Common levels are 23.6%, 38.2%, 50%, and 61.8%. The significance of such levels, however, could not be confirmed by examining the data.[2] Arthur Merrill in Filtered Waves determined there is no reliably standard retracement.

The appearance of retracement can be ascribed to price volatility as described by Burton Malkiel, a Princeton economist in his book A Random Walk Down Wall Street.

Common uses[edit]

Fibonacci retracement is a popular tool that technical traders use to help identify strategic places for transactions, stop losses or target prices to help traders get in at a good price. The retracement concept is used in many indicators such as Tirone levels, Gartley patterns, Elliott Wave theory and more. After a significant movement in price (be it up or down) the new support and resistance levels are often at these lines.

Unlike moving averages, Fibonacci retracement levels are static prices. They do not change. This allows quick and simple identification and allows traders and investors to react when price levels are tested. Because these levels are inflection points, traders expect some type of price action, either a break or a rejection. The 0.617 Fibonacci retracement that is often used by stock analysts approximates to the "golden ratio".[1]

See also[edit]

References[edit]

  1. ^ a b c Aspray, Tom (13 August 2011). "Fibonacci analysis – Master the basics". Forbes. Retrieved 24 October 2016.
  2. ^ Kempen, René (2016). "Fibonaccis are human (made)" (PDF). IFTA Journal.
  • Stevens, Leigh (2002). Essential technical analysis: tools and techniques to spot market trends. New York: Wiley. ISBN 0-471-15279-X. OCLC 48532501.
  • Brown, Constance M. (2008). Fibonacci analysis. New York: Bloomberg Press. ISBN 978-1-57660-261-4.
  • Posamentier, Alfred S.; Lehmann, Ingmar (2007). The fabulous Fibonacci numbers. Amherst, NY: Prometheus Books. ISBN 978-1-59102-475-0.
  • Malkiel, Burton (2011). A random walk down Wall Street: the time-tested strategy for successful investing. OCLC 50919959.
  • MFTA Pershikov, Viktor (2014). The Complete Guide To Comprehensive Fibonacci Analysis on FOREX. ISBN 978-1607967606.
  • Bhattacharya, Sukanto and Kumar, Kuldeep (2006) A computational exploration of the efficacy of Fibonacci sequences in technical analysis and trading. Annals of Economics and Finance, Volume 7, Issue 1, May 2006, pp. 219–230. http://epublications.bond.edu.au/business_pubs/32/
  • Chatterjee, Amitava, O. Felix Ayadi, and Balasundram Maniam. "The Applications Of The Fibonacci Sequence And Elliott Wave Theory In Predicting The Security Price Movements: A Survey." Journal of Commercial Banking and Finance 1 (2002): 65–76.
  • Tai-Liang Chena, Ching-Hsue Chenga, Hia Jong Teoha. Fuzzy time-series based on Fibonacci sequence for stock price forecasting. Physica A: Statistical Mechanics and its Applications, Volume 380, 1 July 2007, Pages 377–390.

External links[edit]