One technique that is quite effective for determining the position in and out of stocks in trading is the Fibonacci retracement. This technical analysis indicator is quite popular among traders. For novice traders, you should be careful because if used incorrectly, this technique can be risky.
Therefore, as a trader, learning the Fibonacci retracement technique should be done gradually. Starting from understanding what it means, what terms are in it, to how to use it. To get a complete understanding, read the following article to the end!
What is Fibonacci Retracement?
Fibonacci Retracement is an indicator developed in the 13th century by Leonardo Fibonacci. The basis of this indicator is the Fibonacci numbers themselves. As for trading, this indicator is useful for identifying the range of price movement and the direction of its reversal.
This indicator can be seen from a pre-existing trend. In addition, another important benefit of this indicator is to predict support and resistance levels that are considered potential in the price of an asset.
The numbers that make up the Fibonacci sequence are called the Fibonacci sequence. In addition, there is also a Fibonacci retracement level starting from 23.6%; 38.2%; 61.8% and 78.6%.
In the world of trading, there will be many important terms that traders must know. Before understanding more about Fibonacci retracement, first understand some of the terms below:
The highest point of an asset before experiencing a decline in price.
Commodities whose prices show an increase when pulled from their lowest point. This commodity will have a series of peaks and valleys that tend to have an upward trend.
Commodities whose price shows a decline when pulled from their highest point. This commodity will have a series of peaks and valleys that tend to have a downward trend.
The lowest point of a candlestick position compared to other candlesticks.
The highest point of a candlestick position compared to other candlesticks.
The lowest point of an asset before experiencing a price increase.
How to Use Fibonacci Retracements?
There are two ways that are used when a trader wants to do analysis with this indicator. The two methods are described as follows:
1.Determine the Support Level
In order to determine support levels on a chart, traders will need the Fibonacci retracement tool. With this tool, traders will be able to connect swing lows with swing highs.
This Fibonacci retracement tool can automatically form support levels.
2. Determine the Resistance Level
When determining resistance levels, the method used is actually not much different when traders determine support levels. The difference is in the process of determining the resistance level, the point connected on the chart is between swing high to swing low.
This principle is the opposite of the principle in determining support levels. Furthermore, the resistance level will appear automatically and traders can see the application of the Fibonacci ratio in it.
Advantages and Disadvantages of the Fibonacci Retracement Indicator
In every trading method used, there must be advantages and disadvantages. In this case, the advantage of using Fibonacci retracements is that it provides fairly accurate information about when traders should enter and exit.
Meanwhile, if it is not used with the right scenario and calculation, the losses that can be suffered by traders are losses which of course make traders lose profits.
There are many benefits that will be obtained by a trader when learning and understanding what Fibonacci retreacement looks like. Some of these benefits are predicting how much the asset will cost in the future and setting targets to take profit.