Ask any professional trader on how to find the best spot to enter the market, and you’ll soon find that the most common answer given is to use the Fibonacci retracement levels. The main reason for this is because most traders unquestionably utilize this tool to help them when making the large investment decisions. Some traders see it as just squabbles of numbers that are claimed to influence the market behavior, but that’s far from the truth. The numbers used Fibonacci studies are not, in any way some form of magic instrument, but are tools that can be used to win bring structure and form to the chaotic world of trading.
The Fibonacci retracement is simply an complementary instrument that is used parallel to the common trading strategies that investors use when trading the markets. Similar to how the roads are marked with different lines to indicate where a driver should remain in their lane, the Fibonacci levels act in a similar manner by estimating the best support and resistance lines, as well as a projected area where the future price may be.
The Fibonacci Ratios
Rather than filling this page with a historical explanation of the origin of the ratios, here’s a debriefing of what they are and how they are applied. Albeit the many other Fibonacci ratios, there are certain levels that have showed great promise in all types of markets:
By using these levels as references, multiple levels can be made from them, but that would only cause your charting graph to be crowded with unnecessary clutter. Many traders have trouble assessing the right levels that are useful to use. The secret to this is to wait. By waiting for the price to react to a Fibonacci retracement level, then the investor can act on it and use it to find good entries in the trending market. An example of this, if the price bounced off of the 38.2% twice, then you could use that level as an opportunity to enter a trade the next time it bounces off of it.
Reality of the Fibonacci Retracement
It isn’t a fortune teller that will assure 100% accurate results, but it acts as an estimator which brings your trading performance to a higher ratio in comparison to trading without. Another great feature that they can do is to set stops and timing entries in the market. Yet, despite all of these great benefits, the most beneficial factor that the Fibonacci retracement gives is advising on how much risk potential is eminent. Controlling your risk is key to being successful when investing, and without it, trading would be akin to gambling in a largest casino in the state. With the different levels displayed with the Fibonacci retracement, it’s no surprise at how experienced traders consider its use when assessing their stop losses and take profit levels. It’s a versatile tool that can be used by traders of all types.