What are Fibonacci retracement levels?

It's very simple. Fibonacci retracement levels The same resistance and support levels, i.e. those levels from which the price is pushed back during the movement. A kind of "ceiling" and "floor" of the price. The difference between the normal resistance and support levels is that the Fibonacci correction levels are calculated based on the Fibonacci sequence, i.e. they are built according to the "golden section" principle.

Why are Fibonacci retracement levels called "retracement levels"?

Because to build support and resistance calculated in this way, we need the presence of a corrective price movement, i.e. a price rise after its fall or, on the contrary, a price fall after its rise. Using such a tool as Fibonacci correction levels, we can calculate further growth or decline targets for the price. You will agree that it is very convenient to know where the price can stop when it rises or falls.

How are the Fibonacci retracement levels calculated?

Imagine that the price of an asset has risen from $100 to $200. In our case, this would be the main trend. The price began to decline. An upward movement of $100 is taken as equal to 100%. This segment begins to divide according to the "golden ratio" principle. What for? The point is that the segments divided in this way give an excellent opportunity to determine the support and resistance levels.

How do you quickly divide the segments according to the golden ratio principle? Very simply, multiply the values by the corresponding Fibonacci coefficients, i.e. 0.236; 0.382; 0.618; 0.786 (see the previous course on the Fibonacci sequence). Thus, we obtain 4 levels (100*0.236 = 23.6; 100*0.382 = 38.2; 100*0.618 = 61.8; 100*0.786 = 78.6). These are the values that can adjust the price.

Hence,

• The first support level will be 200-23.6 = 176.4, or 23.6% according to Fibonacci;
• the second level: 200-38.2 = 161.8, or 38.2% of the Fibonacci retracement;
• the third level: 200 - 61.8 = 138.2, or 61.8% of the Fibonacci correction;
• fourth level: 200 - 78.6 = 121.4, or 78.6% of the Fibonacci correction.
• In fact, in addition to these four levels stand out another important level, which is 50% of the total correction, ie, the level of $ 150.

Why is the correction level in a 50% so important? The most important rule of trading

One of the most important rules of trading is this: markets tend to retrace a distance of 1/3 to ½ the length of the previous trend before resuming further movement. Thus, the level at 50% is the most important level that price tests.

The most important levels of correction, besides 50%

The most important levels of correction are the levels at 38.2% and 61.8% according to Fibonacci. It is at these levels that we should most often expect the price to stop or even reverse.

Fibonacci correction levels" tool

In fact, the need to constantly perform the calculations that we have been doing, of course, is not necessary. Nowadays, on any platform providing access to asset quotes in real time, there is such a tool as "Fibonacci correction levels" or Fib Retracement. Now all we need to do is to find the main trend and the correction in relation to it. And here is where many traders have difficulties - how to choose the first (starting) point...

The point is that often when prices move up or down over a long period of time, they also form additional peaks or declines, which can also be seen as a starting point (first)

There is no rigid rule here. For example, in a number of developments the following rule is given: depending on from the timeframe period.

For example:

• On a timeframe of 1 hour, we can only look at the chart for the last two weeks
• On the four-hour time frame, the chart can be viewed for a period of 6 months
• Daily time frame - possible to consider the schedule for 2 years
• Weekly time frame - in 6 years
• Monthly time frame - 13 years

It is considered that the correction can continue only up to the Fibonacci correction level of 61.8% Fibonacci. I.e., when the price crosses the specified level, the Fibonacci correction levels need to be rebuilt.

What to do after choosing the first (starting) point?

After selecting the time frame and the time period over which we can analyze the chart, we need to find the starting point. Here everything is simple - the starting point is the minimum or maximum value of the price for the selected time interval. If we are plotting a retracement level on a declining (bearish) trend, we will take the minimum as our starting point. On a rising (bullish) trend the maximum price value is the starting point. The first point of Fibonacci retracement levels is set as the starting point, and then the whole grid with levels is stretched on the chart so that the last level touches the maximum (or minimum) price value, i.e. the value from which the retracement started.

What time frame should I choose to build Fibonacci retracement levels?

Any. Fibonacci retracement levels will work on any timeframe you choose. However, it should be noted that most technical analysts do not recommend using timeframes below 1 hour, because on such timeframes the price is more exposed to the so-called "market noise", i.e. a random movement that cannot be predicted.

What to do after building Fibonacci retracement levels?

Now you have an excellent tool for predicting further price movement targets. You can find more information about the correct construction of retracement levels by attending our webinars or watching our training videos.

• How to trade using the Ishimoku indicator? Read more.

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