What is Fibonacci Retracement?
Fibonacci retracement is a technical analysis tool used to identify support or resistance levels. It operates on the theory that after a price moves in a new direction, it will retrace or return partway back to a previous price level before resuming in the direction of its trend.
Key Golden Ratios
- 0.618 (The Golden Ratio) - Strongest reversal point.
- 0.382 - Shallow retracement in strong trends.
- 0.500 - Psychological halfway point (not true Fib).
- 0.786 - Deep retracement ("Last stand").
Trading Strategy
Long (Buying the Dip)
- Wait for a strong uptrend to establish.
- Identify the Swing Low and Swing High.
- Wait for price to pull back to the 0.618 or 0.5 level.
- Buy on confirmation candles (Hammer, Engulfing).
Short (Selling the Rally)
- Wait for a strong downtrend.
- Identify Swing High and Swing Low.
- Wait for price to rally up to the 0.618 level.
- Sell when price rejects the level.
Disclaimer
Fibonacci levels are self-fulfilling prophecies, not magic. They work because many traders are watching them. Always use stop losses, as price can blow through levels during high volatility events.