InvestorQ : Can you explain Fibonacci retracements with a real example to understand the real application? # Can you explain Fibonacci retracements with a real example to understand the real application? Answer 2 years ago
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In fact Fibonacci retracements are something we daily apply on a regular basis. It can be quite useful to identify trades in trending market conditions. Let us take a live illustration of a stock that has been on an uptrend. Let us assume that the price of stock Bunt Ltd. has climbed steadily from Rs.10 to Rs.40. At this point, the stock price begins to fall back a bit. Many investors will look for a good entry level to buy shares during such a price retracement. As long as the underlying trend is up, you can surely use dips to buy. The question is at what level should you buy? That is where the Fibonacci retracements come in handy.

Fibonacci numbers suggest that likely price retracements will extend a distance equal to 24%, 38%, 62%, or 76% of the uptrend move from Rs.10 to Rs.40. Note here that this most basic form of Fibonacci has four characters and the last two numbers represent the (1-x) factor of the first two numbers. For example, 24 and 76 make up 100 while 38 and 62 also make up 100. Investors watch these levels for indications that the market is finding support from where price will begin rising again. For example, if you were hoping for a chance to buy the stock after approximately a 38% retracement in the stock price of Bunt Ltd., you might enter an order to buy around the Rs.29 price level. (The move from Rs.10 to Rs.40 = Rs.30; 38% of Rs.30 is Rs.11 (rounded). Thus the order to buy the stock of Bunt Ltd. on retracement should be ideally placed at Rs.29 (40 – 11).

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