The Fibonacci retracement is a technical analysis tool used to identify potential levels of support and resistance in a financial market. It is based on the idea that prices tend to retrace a predictable portion of a move, after which they continue in the direction of the original trend.
The Fibonacci retracement levels are derived from the Fibonacci sequence, a series of numbers in which each number is the sum of the two preceding ones: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, and so on. The ratios between the numbers in the sequence become the basis for the Fibonacci retracement levels, which are expressed as percentages: 23.6%, 38.2%, 50%, 61.8%, and 100%.
In Forex trading, traders use the Fibonacci retracement tool to identify potential levels of support and resistance in a market. They draw a trendline between two extreme points in the market, such as a high and a low, and then use the Fibonacci retracement levels to identify potential levels where the market may retrace.
The theory behind the Fibonacci retracement is that these levels act as potential areas of support and resistance because many traders use them, and therefore, the market tends to react at these levels. As a result, traders can use these levels to identify potential entry and exit points for their trades.
The effectiveness of the Fibonacci retracement levels depends on how many traders are using them and how much weight they give them in their trading decisions. The levels may not work all the time, but they can be a useful tool when used in conjunction with other technical analysis tools and fundamental analysis.
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