Fibonacci retracements are series of sequences that are used to identify the potential areas of support and resistance on the market chart. They help to identify potential entry levels for trades. These sequences were introduced to the West by an Italian mathematician known as Leonardo Pisano Bogollo from Pisa.
He based his assumption on certain mathematical relationships expressed as ratios between numbers in a series and these ratios were used in different fields like biology, music, art and architecture.
Fibonacci retracements are represented with lines marked with numbers either in percentages or decimals. These can be drawn as follows;
- In an uptrend, pick up a previous lower low place your cursor and drag it up to the higher high of the swing.
- In a downtrend, pick a higher high of the previous swing hold and drag the cursor down to its lower low and release.
The major Fibonacci retracement levels are 23.3%, 38.2%, 50.0%, 61.8% and 100.0%.
Retracement levels are not only used to determine entry levels but also stop loss targets and take profit targets. Stop loss can be placed below or above the entry next to the previous level and the profit targets on the next levels. The commonly used levels for profit targets are 61.8% and 50.0%.
They also work the same way as support and resistance levels so as you expect retracements you should not be surprised when price violets the rules and breaks through. So be ready for anything that happens on these levels.
Apart from Fibonacci retracement levels, you can also use Fibonacci extensions or expansions to determine exit/take profit levels.
Extensions are also used the same way we use Fibonacci retracements. You have to pick swing high and low and then drag the cursor to connect the two points and then to the end of the retracement. This shows how price is likely to move after retracement in the direction of the trend.
Fibonacci works better when combined with other tools like support and resistance, trend lines and candlesticks. All in all, like any other technical indicator, nothing works 100% correct in the market. Due to the market dynamic economic changes anything can happen even if all seems perfect at that moment. Above all the most important thing is to trade with your risk management kit.
How long you should hold an open position, is a personal thing for all traders. The decision is all yours. You know what your goals are as a trader, the kind of strategy you use to trade. All this starts from what you are? and What you want? If I am to answer, this...