InvestorQ : What meant by Fibonacci retracements and how are they useful in technical charting and in trading?
Bhavik Nehru made post

What meant by Fibonacci retracements and how are they useful in technical charting and in trading?

Niraj Mehta answered.
2 years ago

Fibonacci is a lot more about mathematical patterns and less about chart patterns. In fact, Fibonacci extrapolates these mathematical patterns into the price chart and takes it forward. Fibonacci levels are an extremely popular technical analysis tool. While the concept is quite empirically sophisticated, its application is not all that difficult. In fact, Fibonacci was a 12th-century mathematician in Italy who developed a series of ratios that is very popular with technical traders. Fibonacci ratios, or levels, are commonly used to pinpoint trading opportunities and both trade entry and profit targets that arise during sustained trends. In fact, Fibonacci ratios are not just about trades but about any general pattern that is followed by unbiased movements.

The primary Fibonacci ratios are 0.24, 0.38, 0.62, and 0.76. These are often expressed as percentages i.e. 23%, 38%, etc. Note that Fibonacci ratios complement other Fibonacci ratios: 24% is the opposite, or remainder, of 76%, and 38% is the opposite, or remainder, of 62%. As with pivot point levels, there are numerous freely available technical indicators that will automatically calculate and load Fibonacci levels onto a chart. You can go to any basic technical chart software and these can help you in identifying the Fibonacci pattern and trading based on that.

Let us now focus on the most important and commonly used technique of Fibonacci retracements which is one of the most popular Fibonacci indicators that is most commonly used by traders. After a security has been in a sustained uptrend or downtrend for some time, there is frequently a corrective retracement in the opposite direction before price resumes the overall long-term trend. We all have intuitively seen this happen with stocks and indices. Even as the Nifty uptrend may be intact, you do see intermittent corrections coming in the Nifty. Fibonacci retracements help you to trade such reversals and retracements. Fibonacci retracements are used to identify good, low-risk trade entry points during such a retracement. That is what Fibonacci retracements are all about!