Fibonacci ratios are one of the most commonly used techniques in technical analysis of the financial markets. If you are already a successful trader or a trader just starting out, Fibonacci Retracements provide valuable insight and triggers on where high probability change will happen.
The Fibonacci Retracement is likely the most common of all Fibonacci related tools. While there are many variations of the ratio set, I think simple is better.
- 23.6% — The shallowest of the retracements. In very strong trending markets price typically quickly bounces in the area of this ratio.
- 38.2%— This is the first line of defense of the current trend. Breaking this level starts to erode the underlying trend.
- 50% — the neutral point of any retracement. This is the critical tipping point.
- 61.8% — retracing to this typically signals a breakdown in the trend.
- 100% — Matching the initial move
Within this set, 38.2%, 50% and 61.8% I find quite reliable. I use the others as more confirmation and as part of clusters.
The Fibonacci Extension is less common but just as powerful when correctly applied. Used as part of a money management strategy and as profit target projection tool, Fibonacci Extensions provide guidance on where price will potentially stall or change direction.
Used in combination, these two ratio sets provide very tradable indicators of opportunity. If you then combine Fibonacci with other indicators like oscillators and moving averages, you can quickly identify high potential risk/reward opportunities. While not perfect, they are one of the best tools available.