Feb 27,2020

(A) Introduction

  • Fibonacci Retracement (Fibo) is a tool that is based on key numbers or also known as psychological levels which are used to predict levels for potential reversals.
  • Besides that, the key numbers can also be used as resistance or support levels.
  • Fibo can only be used when there is a potential trend reversal where it is then pulled from the starting point to the ending point of the previous trend before the reversal happens. Note that trend reversal can be a rebound or retracement.

(B) Uses of Fibonacci Retracement

  • In general, the Fibo is used when an instrument changes its major trend either from bullish to bearish or vice versa. A Fibo is then drawn showing key supports or resistance for the new trend.
  • The Fibo have 6 major key levels being: 0%, 23.6%, 38.2%, 50%, 61.8% and 100% where the breakout above or below the key level 23.6% normally acts as confirmation for the major trend reversal. This said, investors will normally wait until the retracement breakout from the 23.6% key level before entering into the market.

  • All of the key levels in the Fibo can act as psychological resistance and support levels. 

(C) Limitations of Fibonacci Retracement

  • Fibonacci Retracement can only be used when there is a reversal in trend and not for instruments that has achieved new high or new lows.

  • Many traders will tend to wrongly draw the Fibo which would in turn provide false indications and signals. Therefore, it is utmost important to make sure to draw Fibo accurately. 

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