Fibonacci retracements are a technical analysis tool used to identify potential levels of support and resistance in financial markets. The tool is based on the Fibonacci sequence, a series of numbers in which each number is the sum of the two preceding numbers (e.g., 0, 1, 1, 2, 3, 5, 8, 13, 21, etc.).
To use Fibonacci retracements, you first identify a significant price movement in the market, such as an uptrend or downtrend. You then draw a line between the high and low points of the movement, called the trendline. The retracement levels are calculated by dividing the vertical distance between the high and low points by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8%, and 100%.
The retracement levels are then drawn on the chart as horizontal lines. These levels represent potential areas of support or resistance where the price may bounce back up or down from. Traders use these levels to identify potential entry and exit points for their trades, as well as to set stop-loss and take-profit orders.
In general, the 38.2% and 61.8% retracement levels are considered the most significant, as they are close to the Golden Ratio of 1.618. The 50% level is also important, as it is a common retracement level that can indicate a potential trend reversal.
It's important to note that Fibonacci retracements are not always accurate and should be used in conjunction with other technical analysis tools, such as trendlines, support and resistance levels, and chart patterns. They can be useful tools
in identifying potential areas of support and resistance in financial markets, but traders should always conduct their own research and analysis before making any trading decisions.