Fibonacci Retracement Levels

October 21, 2009 | Posted by Andrew

Learn Fibonacci Retracement! As a trader, you need to learn many things. The most important thing that you must master as a trader is making the correct entry and exit decision in a trade. Have you ever heard of Fibonacci Retracement or Fibonacci Corrections? Many traders use Fibonacci retracement levels in making their entry and exit decisions for a trade. Traders use Fibonacci Retracement levels to help identify the price support and resistance. What is more important is how you use Fibonacci Retracement levels in different trading situations. Try these cash printing Forex Signals from heaven. Know these Candlestick Patterns!

In order to understand Fibonacci retracement levels, you should know something about the Fibonacci sequence. Fibonacci sequence is derived by adding the two proceeding numbers to find the next number in the sequence. The first two numbers are 0, 1 and after that you can add the two proceeding numbers to find the next number. So, the third number will be 1, the fourth: 2, the fifth: 3, the sixth: 5 and so on. The sequence develops like this: 0,1,2,3,5,8,13,21,34,55,89,144,233,377,610,987,………..out to infinity.

There is a very important ratio obtained by dividing the higher number with the lower one preceding it in the sequence above. Divide 233 by 144, you get 1.618. This ratio is known as the golden mean and is very important. The inverse of this ratio is 0.618. Another ratio that is important is obtained by dividing any number in the sequence by two numbers higher. So divide 144 by 377, you obtain 0.381.

Traders use these two numbers in addition to 0.0.5 and 1 as Fibonacci retracement levels. So the Fibonacci retracement levels will be 0, 38.1%, 50%, 61.8% and 100%. Traders think that price action will tend to find support or comfort at these levels. It is another question whether it does or not. Most of the traders use the number 38.1% as entry point in the trending market.
So you should become familiar not only with Fibonacci retracement levels but also Fibonacci projections and extension if you are really serious in becoming a good trader. Now an important question that comes to mind is that does the market believes in these numbers?

We all know that markets are just people buying and selling. What the people believe, the markets believe too. In other words, people’s emotions and sentiments have a lot to do with determining the behavior of the market. When people are bullish, markets are bullish and when the people are bearish, markets are bearish. Therefore, when majority of the traders use Fibonacci retracement levels in their trading, markets start believing in them!

Now most of the trading software that you use for trading has got Fibonacci Retracement levels automatically build into your charts. You don’t have to do anything. Just click on the menu and click on Fibonacci Retracement Levels and viola these levels will be visible on your trading chart!

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