finance Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fina ...

, Fibonacci retracement is a method of technical analysis for determining

support and resistance In stock market technical analysis, support and resistance are certain predetermined levels of the price of a security at which it is thought that the price will tend to stop and reverse. These levels are denoted by multiple touches of price with ...

levels. It is named after the Fibonacci sequence of numbers, whose ratios provide price levels to which markets tend to retrace a portion of a move, before a trend continues in the original direction. A Fibonacci retracement forecast is created by taking two extreme points on a chart and dividing the vertical distance by Fibonacci ratios. 0% is considered to be the start of the retracement, while 100% is a complete reversal to the original price before the move. Horizontal lines are drawn in the chart for these price levels to provide

levels. Common levels are 23.6%, 38.2%, 50%, and 61.8%. The significance of such levels, however, could not be confirmed by examining the data. Arthur Merrill in ''Filtered Waves'' determined there is no reliably standard retracement. The appearance of retracement can be ascribed to price volatility as described by Burton Malkiel, a Princeton economist in his book ''

A Random Walk Down Wall Street ''A Random Walk Down Wall Street'', written by Burton Gordon Malkiel, a Princeton University economist, is a book on the subject of stock markets which popularized the random walk hypothesis. Malkiel argues that asset prices typically exhibit s ...

''.

Common uses

Fibonacci retracement is a popular tool that technical traders use to help identify strategic places for transactions, stop losses or target prices to help traders get in at a good price. The main idea behind the tool is the support and resistance values for a currency pair trend at which the most important breaks or bounces can appear. The retracement concept is used in many indicators such as Tirone levels, Gartley patterns,

Elliott Wave theory The Elliott Wave Principle, or Elliott wave theory, is a form of technical analysis that finance traders use to analyze financial market cycles and forecast market trends by identifying extremes in investor psychology and price levels, such as h ...

, and more. After a significant movement in price (be it up or down) the new support and resistance levels are often at these lines. Unlike moving averages, Fibonacci retracement levels are static prices. They do not change. This allows quick and simple identification and allows traders and investors to react when price levels are tested. Because these levels are inflection points, traders expect some type of price action, either a break or a rejection. The 0.618 Fibonacci retracement that is often used by stock analysts approximates to the " golden ratio".

Criticism

Extensive backtests of Fibonacci retracement over thousands of instances 489 different

stock In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...

s have shown that the retracements values of 38%, 50%, and 62% had been no likelier to appear than any other of the possible retracement values.

References

External links

Video of a test of 100 Fibonacci retracement instances
{{technical analysis, state=collapsed Chart overlays Fibonacci numbers Technical analysis

Common uses

Criticism

See also

References

External links