Fibonacci retracements, despite not being an exclusively stock market indicator, can be a very interesting analysis tool for trading.
We are talking about a high-quality indicator that is often used to build real trading strategies, thanks to its reliability and the accuracy of the signals it offers. Learning to use this indicator is a goal for many traders. It is not easy to set up, but with study and practice in Demo it will be possible to master it and use it to the fullest.

What are Fibonacci retracements?

Fibonacci retracements can be considered a chart analysis tool capable of establishing support and resistance areas, breaking down the height of a market move into different levels derived from Fibonacci ratios.
As we said at the beginning, Fibonacci retracements cannot be considered an exclusively stock market indicator. However, it is interesting to focus the technical analysis since they support the theory on market movements, rhythmic movements, and that, within these rhythms, the Fibonacci sequence is present.
The most common Fibonacci retracements are 61.8% (rounded to 62%) and 38.2% (rounded to 38%). After an advance process, the Fibonacci proportions will be applied in order to try to define the retracement levels, and predict the amplitude of the correction.
These Fibonacci retracements are also applied after a fall in order to try to find out the possible length of a rebound. Although their application is diverse, it is not usual to use them as a starting point or input to our investment system: they are more suitable in combination with other trading indicators, as well as with price patterns, thus being able to formulate global strategies.
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How to calculate Fibonacci retracements?

It is a bit complicated to try to understand the reflection on the use of Fibonacci retracements if we do not know something more about the mathematical properties of the Fibonacci sequence, at least the most obvious and well-known ones.
This is a succession attributed to a 12th/13th century Italian mathematician, Leonardo Pisano . The succession establishes a series of mathematical relationships that are attributed as patterns to areas as diverse as architecture, art, biology, by nature itself.
In relation to what is called the golden ratios , it is considered that these proportions, when they are met, reflect a canon of universal beauty. In the case of investment, it would be human behavior that is reflected in the market, obtaining a nature character in terms of its movements.

The Fibonacci sequence is the following:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610……

And it goes on like this to infinity. As we see, after 0 and 1, each new number is the sum of the two previous numbers.
This sequence provides some mathematical scenarios worth considering. Let's look at some of the most popular:

A number divided by the number above will approximate 1.618.
A number divided by the subsequent number will approximate 0.6180. In this case, the basis for the Fibonacci retracement of 61.8% is taken.
A number that is divided by another number two places later approximates 0.3820. This would be the base taken for the 38.2% Fibonacci retracement.
A number divided by the number behind it three times will approximate 0.2360. This would be the basis for the 23.6% Fibonacci retracement.

Between any number and the next there is always a correlation of 0.618. Between that same number and the previous one, there is always a correlation of 1.618. When you divide 1/0.618 the result will be 1.618. This is what is known as the golden ratio.
https://preview.redd.it/qlcbts8k9qw91.png?width=757&format=png&auto=webp&s=d0a2ca03593d4774f93d68585eab0200182dde9e

How are Fibonacci retracements applied to trading?

Within the different tools that are used based on the Fibonacci sequence, retracements are the most used tool.
When you want to pinpoint Fibonacci retracements and translate them onto your chart, you first need to identify the extreme points of the strong market move. This results in a vertical line drawn whose height has to be equal to the height between those two extreme points.
The vertical line is divided by another nine horizontal lines that will cross the trend line at the following Fibonacci levels:

0.0%
23.6%
38.2%
fifty%
61.8%
100%
161.8%
261.8%
423.6%

When a significant drop or rise occurs, prices often return to a previous level corrected in this way as part of their initial move. It is on this return journey that prices may find support or resistance at or near the Fibonacci line levels.

How to trade with Fibonacci retracements?

Fibonacci retracements can be used as a warning level for predicting support and resistance in the market.
When trading Fibonacci retracements, the most usual interpretation is as follows:

a 38.2% retracement inserted into a trend will be an indication that the general trend is going to hold.
a 61.8% retracement would mark the start of a new trend.

If you look closely, 50% is also included in the lines. Obviously this is not a number belonging to the Fibonacci series, but it is introduced based on the statement of the Dow Theory: that indicates that the averages, generally, will travel the average of their previous movement.
As we indicated previously, the retracement levels are used as warning zones to be able to enter a trade. However, its potential is not recommended as a single input item. It is interesting at this point the combination with other elements of technical analysis that allow to identify without entry is correct or not.

Conclusion

Fibonacci retracements will generally be used to identify the completion of corrections, or bounces against the trend. It is common for these corrections or rebounds to partially reverse previous movements.
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