How to Use Fibonacci Retracement

Fibonacci retracement is an indicator that overlooks support and resistance points, so traders can determine when to enter the market to gain profits and determine loss points. Fibonacci retracement is used by traders in the foreign exchange (forex) market.

The Fibonacci indicator will work very well when market conditions are trending. To find these Fibonacci retracement levels, traders must find significant recent swing highs and swing lows.

In technical analysis, the Fibonacci retracement indicator is depicted as horizontal lines that represent the ratio of Fibonacci numbers. The ratios commonly used in Fibonacci retracements are 23.6%, 38.2%, 61.8%, and 78.6% or can also be displayed in decimal form. Although not included as a Fibonacci ratio, traders also often add 50% or 0.5 to the Fibonacci retracement indicator as a guide to find out the price of the midpoint of swing highs and swing lows.

If the price continues to move up when it hits its Fibonacci level, most likely the price can continue to rise. Likewise, if the price fails to break through the Fibonacci level, it is likely that the price will reverse direction so that traders can target this stop loss level.

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