0Fibonacci retracement is a popular technical analysis tool used in the stock market to identify potential levels of support and resistance. These levels are based on key Fibonacci ratios, which are derived from the Fibonacci sequence.
1. Identify the Trend:
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First, you need to identify the trend in the stock or market. Fibonacci retracement levels are used in both uptrends (bullish) and downtrends (bearish).
2. Choose the Right Points
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In an uptrend, select the lowest point to the highest point .
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In a downtrend, select the highest point to the lowest point .
These swing points will act as the starting and ending points for the retracement.
3. Apply Fibonacci Retracement Levels:
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Once you've identified the swing points, use a Fibonacci retracement tool, available in most charting platforms to draw a line from the low to the high (or from the high to the low, depending on the trend).
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The tool will automatically plot horizontal lines at key Fibonacci retracement levels:
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23.6%
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38.2%
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50% (this is a key level even though it's not a Fibonacci number)
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61.8%
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78.6%
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These levels represent potential areas where the price may find support or resistance.
4. Interpret the Levels:
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Support and Resistance: In an uptrend, if the stock starts retracing (pulling back), these levels may act as support. In a downtrend, the levels may act as resistance.
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Potential Price Reversal: Watch for price to react at these levels. If the price finds support at a Fibonacci level, it may continue moving in the direction of the original trend. If it fails to hold at these levels, it may indicate a reversal.
