![fibretracement](https://upload.wikimedia.org/wikipedia/commons/1/1c/Fibretracement.png)
In
finance, Fibonacci retracement is a method of
technical analysis
In finance, technical analysis is an analysis methodology for analysing and forecasting the direction of prices through the study of past market data, primarily price and volume. Behavioral economics and quantitative analysis use many of the sam ...
for determining
support and resistance levels.
It is named after the
Fibonacci sequence
In mathematics, the Fibonacci numbers, commonly denoted , form a sequence, the Fibonacci sequence, in which each number is the sum of the two preceding ones. The sequence commonly starts from 0 and 1, although some authors start the sequence from ...
of numbers,
whose ratios provide price levels to which markets tend to retrace a portion of a move, before a trend continues in the original direction.
A Fibonacci retracement forecast is created by taking two extreme points on a chart and dividing the vertical distance by Fibonacci ratios. 0% is considered to be the start of the retracement, while 100% is a complete reversal to the original price before the move. Horizontal lines are drawn in the chart for these price levels to provide
support and resistance levels. Common levels are 23.6%, 38.2%, 50%, and 61.8%. The significance of such levels, however, could not be confirmed by examining the data. Arthur Merrill in ''Filtered Waves'' determined there is no reliably standard retracement.
The appearance of retracement can be ascribed to
price volatility as described by
Burton Malkiel
Burton Gordon Malkiel (born August 28, 1932) is an American economist and writer most noted for his classic finance book '' A Random Walk Down Wall Street'' (first published 1973, in its 12th edition as of 2019). He is a leading proponent of the e ...
, a
Princeton
Princeton University is a private research university in Princeton, New Jersey. Founded in 1746 in Elizabeth as the College of New Jersey, Princeton is the fourth-oldest institution of higher education in the United States and one of the ni ...
economist
An economist is a professional and practitioner in the social science discipline of economics.
The individual may also study, develop, and apply theories and concepts from economics and write about economic policy. Within this field there are ...
in his book ''
A Random Walk Down Wall Street
''A Random Walk Down Wall Street'', written by Burton Gordon Malkiel, a Princeton University economist, is a book on the subject of stock markets which popularized the random walk hypothesis. Malkiel argues that asset prices typically exhibit s ...
''.
Common uses
Fibonacci retracement is a popular tool that technical traders use to help identify strategic places for transactions, stop losses or target prices to help traders get in at a good price. The main idea behind the tool is the support and resistance values for a currency pair trend at which the most important breaks or bounces can appear. The retracement concept is used in many indicators such as Tirone levels, Gartley patterns,
Elliott Wave theory, and more. After a significant movement in price (be it up or down) the new support and resistance levels are often at these lines.
Unlike
moving averages, Fibonacci retracement levels are static prices. They do not change. This allows quick and simple identification and allows traders and investors to react when price levels are tested. Because these levels are inflection points, traders expect some type of price action, either a break or a rejection. The 0.618 Fibonacci retracement that is often used by stock analysts approximates to the "
golden ratio
In mathematics, two quantities are in the golden ratio if their ratio is the same as the ratio of their sum to the larger of the two quantities. Expressed algebraically, for quantities a and b with a > b > 0,
where the Greek letter phi ( ...
".
Criticism
Extensive
backtests of Fibonacci retracement over thousands of instances 489 different
stocks have shown that the retracements values of 38%, 50%, and 62% had been no likelier to appear than any other of the possible retracement values.
See also
*
Trend line
*
Elliott wave principle
The Elliott Wave Principle, or Elliott wave theory, is a form of technical analysis that finance traders use to analyze financial market cycles and forecast market trends by identifying extremes in investor psychology and price levels, such as hi ...
References
External links
Video of a test of 100 Fibonacci retracement instances
{{technical analysis, state=collapsed
Chart overlays
Fibonacci numbers
Technical analysis