When it comes to trading, technical analysis is one of the most important aspects any trader should aspire to have under his belt and among technical analysis techniques, the fibonacci retracement has proved time and time again to be one of the most powerful indicators of price action.
The Fibonacci Retracement strategy, based on the well-known Fibonacci sequence, focuses on key levels like 23.6%, 38.2%, 50%, and 61.8%. These levels can be applied in both uptrends and downtrends to spot potential reversal points. Additionally, they serve as useful tools for determining areas of support and resistance.
The Fibonacci Retracement Strategy is based on a famous mathematical phenomenon and its influence can be seen even on the trading charts! Traders can be a lot more confident of their trade when employing the use of this indicator.
For instance, if an asset drops from $120 to $100 in a bearish move, the Fibonacci retracement strategy can be applied by using $120 as the starting point and $100 as the endpoint of the decline. Once the Fibonacci tool is correctly applied, various Fibonacci levels will appear. This gives traders an indication of potential levels where the price could reverse if the downward trend persists.
In an ideal scenario, traders will identify a downtrend and mark the same using the fibonacci retracement tool when they discover retracement. Price will then retrace and rise towards the aforementioned fibonacci level and slow down. This is when traders can place a short on the market in the hopes that the bearish move continues.
Having this insight into high probabilistic levels of reversal can greatly boost trading success especially when combined with similar biases formed through other technical analysis techniques.
The majority of successful traders have made their first millions through clever implementation of this technical analysis tool.
While the fibonacci retracement is no doubt an extremely powerful tool, it can lead to losing trades if not implemented properly.
Traders should never blindly trust the fibonacci retracement tool and enter a trade every time price retraces towards one of the main fibonacci levels. All forms of technical analysis are significantly more accurate when combined with each other.
Due to the nature of the tool, amateur traders often draw the fibonacci retracement tool every chance they get and do their best to make it the fibonacci level appear strong by constantly readjusting the tool. This gives these traders a false sense of confidence in a losing trade.
Another common mistake is ignoring the prevalent market conditions. The fibonacci retracement tool just like all other forms of technical analysis is at best an educated guess as to how the market might behave. If the overall sentiment of an asset is bullish then traders should not enter a short simply because the fibonacci retracement tool tells them to short the market.
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