There are many technical analysis tools which a trader can refer to. Technical analysis is one part of the trio. The other two are of course fundamental analysis and news trading. Now, a trader looks to use all these technical tools for predicting the movement of stock, its price reversals, rally and correction, support and resistances. Fibonacci retracement is one method of trading the market. Of course this indicator gives greater accuracy if it’s used in combination with Bollinger bands, trend lines, candlestick bars and others.
Sometimes when a market does well, it gets a tendency to retrace a little as those who had contributed to the strength take their profit share. This gives great opportunity for a fresh trader to buy the same currency at cheap levels. The phenomenon is called retracement.
Fibonacci retracements are percentage values which are primarily used to determine the length of correction in a forex market. Fibonacci series or numbers were discovered by mathematician Leonardo Fibonacci. These are numbers which are the sum total of previous two numbers. For instance 5, 11, 16, 27, 43, 70, 113 is a Fibonacci series. If you understand these numbers well you will profit as a swing trader by knowing which direction an asset will move towards.
A Fibonacci retracement grid tries to predict the day at which the currency market can take the u-turn. This means that the trader can look for secure price and time and play for powerful reversals. The Fibonacci retracement grid suggests pre-assessed support and resistances areas. This helps in making the correct decision by reading the chart. Through this a swing trader (in particular) makes his own levels. If the Fibonacci retracement line is above the ARI, it is quite easy to conjecture the percentage retracing of a particular currency.
Now the theory which is the working principle of Fibonacci grid is simple. Before a currency reverses, it pulls back a nominal percentage. According to the Fibonacci retracement graph, such reversals happen at 38.2%, 50% and 61.8%; now 50% is more of a sentimental association and not a technical one. It is believed that a stock has a good chance of retracing at half the level.
In all, there are four very popular Fibonacci studies. These are the arc, time zone, fan and retracement studies. Fibonacci retracements are read by drawing lines over two main points. These are the low and the high peaks. The idea is to draw many parallel horizontal lines which intersect the trend lines at 0%, 33%, 38.2%, 50%, 66.6%, 68.2% 100%. (Pre-stipulated two in tandem)
Now how does a trader profit? Well, after a major price reversal, currencies get resistance or correction levels at the Fibonacci retracement points. So if you know your points right, there is a great chance that you will stand to benefit through it.