What is Fibonacci Retracement and Extension? Understanding Technical Analysis in Trading
nahidaauthorTechnical analysis is a valuable tool in the world of trading, helping investors and traders make informed decisions based on the historical movement of stock prices, currency rates, and other financial instruments. One of the most popular techniques within technical analysis is the Fibonacci retracement and extension, which helps identify potential support and resistance levels in a stock's price movement. This article will provide an overview of what Fibonacci retracement and extension are, how they are calculated, and their relevance in trading.
What is Fibonacci Retracement and Extension?
Fibonacci retracement and extension are two key concepts within the Fibonacci series, a mathematical principle developed by the Italian mathematician and banker Nicolaus Fibonacci in the 12th century. The Fibonacci series is a sequence of numbers where each number is the sum of the two previous ones, starting from 0 and 1. The most famous aspect of the Fibonacci series is the Fibonacci retracement, which identifies potential support and resistance levels in a stock's price movement.
Fibonacci retracement is the measurement of a stock's price movement from its most recent high or low to its previous high or low, divided by its previous high or low to its most recent high or low. The Fibonacci retracement levels are calculated at 38.2%, 50%, and 61.8% of the move from the most recent high or low to the previous high or low.
Fibonacci extension is the measurement of a stock's price movement from its most recent low to its previous high, divided by its previous high to its most recent low. The Fibonacci extension levels are calculated at 26.4% and 73.2% of the move from the most recent low to the previous high.
Calculating Fibonacci Retracement and Extension
To calculate Fibonacci retracement and extension levels, you first need to identify the highest high and lowest low in the price movement you want to analyze. From there, you can calculate the retracement levels using the formula described above, and the extension levels using the formula for the extension.
Relevance in Trading
Fibonacci retracement and extension levels are widely used in trading to identify potential support and resistance levels. Many traders and investors use these levels to determine where to buy or sell stocks, currencies, or other financial instruments. When a stock's price moves through a Fibonacci retracement or extension level, it is often considered a positive or negative signal, indicating that the price may be poised to continue moving in that direction.
Fibonacci retracement and extension are important concepts within technical analysis, helping traders and investors identify potential support and resistance levels in a stock's price movement. By understanding and applying these principles, you can make more informed decisions about where to buy or sell financial instruments, ultimately increasing your chances of success in the world of trading.