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If you’re stepping into the thrilling world of trading, there’s a powerful tool you need to know about – Fibonacci retracement.
It might sound complex, but we’re here to break it down into bite-sized pieces, making it not only simple to grasp but also a trendy addition to your trading arsenal.
It’s just amazing to find Fibonacci patterns on charts across all time frames and on all symbols.
And with that knowledge, you can try to predict what the market is going to do next and place your trades accordingly.
The Fibonacci Retracement
In the labyrinth of financial markets, traders often seek reliable guides to navigate the twists and turns.
And this is where Fibonacci retracement can come in handy – your compass for predicting potential market support and resistance levels.
Meet Leonardo Fibonacci
Before we delve into the magic, let’s meet the man behind the concept: Leonardo Bigollo.
Aside from popularizing Arabic numerals (the numbers we use daily), he uncovered a captivating numerical sequence that occurs naturally in our world. This sequence, known as the Fibonacci sequence, forms the foundation of our market analysis.
The Fibonacci sequence boasts ratios that can unveil patterns in price levels.
Traders harness this knowledge to craft strategies and target profits. Among these ratios, one stands out: the 0.382 level. Let’s understand more about it…
The 0.382 Fibonacci Level
Picture this level as a magnet for market movements. During an uptrend, it acts as a target, while in a downtrend, it becomes a critical point of interest.
So, the 0.382 level is a Fibonacci retracement level and it’s called the up retracement zone when it is in an uptrend or the down retracement zone when it is in a downtrend.
It’s a simple ABCD pattern which helps us predict where the market will go next based upon its location within the AB boundary on the Fibonacci.
Here’s the key insight: When the market surges from point A to point B, it often retraces back to the 0.382 level. This phenomenon repeats itself across various timeframes, from hourly charts to monthly ones.
Here’s what this pattern looks like…
Market Reacting at the 0.382 Level
Source: Market Traders Institute
As seen in the image above, the market rallies from A to B level and falls back to the 0.382 level.
So, whenever we see the market (or any asset) passing forming a high or “B” level, we can predict there’s likely going to be a pull-back or retracement back to the 0.382 level.
Conversely, if the market (or an asset) is forming a low or coming back to the “A” level, we can predict there’s likely going to be a bounce back to the 0.382 level.
Once we understand this, voila – we can now place trades to target some quick potential profits OR make long term position plays.
Here’s how you can use this strategy on your charts…
Using Smart Fib on SmartTrader
Open up a new chart on your SmartTrader trading platform.
(Bonus: Check out our all-access pass to charting workspaces, customizable indicators, alerts, and much more! Know more here >)
Next, go to the indicators list located at the top of the chart and click on the ‘Smart Tools’ button. You will be able to see something called ‘Smart Fibs’ and when you click on it, it will automatically clock the Fibonacci levels on your chart!
Here’s how it should look:
0.382 Levels Indicated by the Red Lines
Source: SmartTrader, Market Traders Institute
Spot the middle red line on your chart? That’s the 0.382 Fibonacci level.
The EURAUD pair did touch the middle red line for each area that the dotted A-B line covers. Which means that this 0.382 level acts as a magnet for the price movement.
So, one should watch closely as the market nears this level.
If prices are in a downward spiral, consider setting up a sell trade when they approach near this magic line. It’s a chance to potentially profit as the market retraces or pullbacks.
On the other hand, one can go long (or buy trade) on a retracement at a Fibonacci support level when the market is trending upwards.
All in all, Fibonacci retracement is one of the simple Fibonacci strategies which you can use to predict market trends and target some potential profits.
Moreover, it’s an amazing indicator of the market trend and can play a key role in influencing the uptrends and downtrends on multiple time frames.
The next time you’re poring over your charts, don’t forget to give Fibonacci retracement a spin!
We’ve also recorded a short video on this concept: Click here to watch it.
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