What is a Fibonacci retracement? How does it work in trading?
Fibonacci retracement tool is one of the effective technical analysis based tool which does play and very important role to understand the market support and resistance areas, market trend, trading reversals, etc. Most of technical trader’s are very familiar to the fibonacci tool, though this is only a tool and without a proper understanding of market buyer’s and seller’s no trading tool would be utilized properly in trading. Hence we would suggest trader’s and investor’s to pay attention on the commercial trader’s approach at first and trading tools and indicator’s those should be only use as our second confirmation in trading.
There is no doubt in it that technical analysis is the main basic need of our trading and its good to see that the fibonacci trading tool does make it more easier to understand the market support and resistance lines with couple of important lines those are mentioned in percentage, the important fibonacci levels are 38.2%, 50%, 61.8%, etc. Actually there is no use of any math formula here, in simple words we are just checking the correction and according to that we are calculating the future movements. Still get confused? Lets try to understand in more simple words.
Every financial market has a term called “reversal” or we can say correction. There is no market which will go up or down without a correction and we does make a use of fibonacci tool for checking it that how much reversal we will able to see or market will stable with the current trend or not. Even there are so many other benefits of fibonacci tool those can give us a great helping hand to do trade nicely in any type of financial market. Lets have a look that how does it work in trading, and how to make a use of it in trading.
How does it work?
its very easy to use fibonacci tool and the main goal is always to check the impact of reversal market, and if we see market is giving good respect to the levels like 61.8%, 50%, 38% then we assume that once again trend will be continue to its current market direction. During an uptrend we have to use this tool as lower to upward area, just check your last support and modulate it with your upside resistance area as shown in the H4 time frame Gold chart below
In other words during an uptrend you can modulate your Higher Low area to your Higher high area which can give you a great help to understand the market support and resistance later. When a market trend is very bullish that time this tool does provide very good trading signals. The picture shown as above is the picture of a long term trend and according to this picture we are in the middle of a trend for now. Keep in mind that when we are at bottom that time trading signals could be wrong also, but if you are in a middle of a trend that time a set of good trading signals can be seen on your chart.
That’s why we have said that a good understanding of commercial trader’s would be very necessary to make a good use of fibonacci tool. Furthermore if we has a Higher high and higher low series on chart that time also some good signals can be seen on chart for a buy. We have to make sure a higher high and a higher low series are arising after a long downfall movement.
Let’s have a look that how it does work in a downtrend market, the above topic was all about the uptrend market analysis and now we are gonna talk about the fibonacci tool downtrend market analysis. Keep in mind that if a Lower high and Lower low pattern is appearing on the screen then it means a chance of downfall may come in the market price. This type of situation does mostly available when a uptrend is getting ending.
See this is a fibonacci tool analysis during a downfall, or an fibonacci analysis after the Lower High and Lower Low market pattern. Trend analysis would be so much important to use during the use of our fibonacci tool analysis, As we can see above in the Gold H4 chart time frame, market is now going down and we had our first confirmation above that was the Lower high and Lower low chart pattern indication.
Though not trading pattern are fixed in financial market, they can be change so many time and that’s why we should have a good understanding of big market players, personally we also believe in price action trading techniques and all we know that only big players does move the market no indicator, or trading tool does bring heavy movement in financial markets. This market is all about the commercial trader’s buying and selling.
Along with it you have to make sure that long term market trend analysis will be prominent to make on a regular bases, especially if you like’s to do trade in short term time frames with fibonacci tool then it would be crucial to do a regular check on long term time frames market analysis. Long term time frames are more clear and transparent about the market trend so it will be good to use the fibonacci in long term time frames. Though this is not fixed at all, depend upon your trading skill and understanding too. Furthermore as we have mentioned so many time in our topics that the commercial trader’s make their buying and selling decisions according to the long term time frames trend analysis only, They don’t do trade in short term time frames, that’s it.
There is no doubt in it that fibonacci trading is very profitable tool but the lack of knowledge and wrong understanding can still bring so many big losses in account, always keep in mind that a trading tool is not a money making thing. The real trading knowledge is all about learning and understanding big market players, we have to follow their footprints to earn consistent money in commodity market, stock market, forex market, crypto market etc.We hope you liked the content thanks for reading, and if you have any questions just write down your comments below.