Fibonacci Retracement Strategy – How to Identify Support & Resistance in Trading

 

Fibonacci Retracement Strategy – A Trading Secret You Need to Know

Introduction – A Curious Conversation

Tamili: Hey Parkavi! I’ve noticed that certain levels in stock prices seem to repeat. Is there any reason behind this?

Parkavi: Great observation, Tamili! Those levels are not random. Traders use a powerful tool called Fibonacci Retracement to identify them. It helps in finding support and resistance levels in the market.

What is Fibonacci Retracement?

Tamili: I’ve never heard of Fibonacci Retracement before. How does it work?

Parkavi: Fibonacci numbers follow a sequence where each number is the sum of the previous two:

Example: 0, 1, 1, 2, 3, 5, 8, 13...

Traders use specific Fibonacci ratios to predict potential price reversal points. The most important ratios are:

• 23.6%
• 38.2%
• 50% (not derived from Fibonacci but widely used)
• 61.8% (Golden Ratio)
• 78.6%

Understanding Fibonacci Ratios

How Are Fibonacci Levels Derived?

Tamili: But where do these percentages come from?

Parkavi: Here’s how they are calculated:

• 23.6%: A number divided by another three places to the right. (Example: 8 / 34 = 0.2353)
• 38.2%: A number divided by a number two places to the right. (Example: 21 / 55 = 0.3818)
• 61.8% (Golden Ratio): A number divided by the next number. (Example: 34 / 55 = 0.6181)
• 78.6%: The square root of 61.8% (√0.618 ≈ 0.786)

Applying Fibonacci Levels in Trading

Step 1: Identifying Key Levels

Tamili: Can you give me a practical example?

Parkavi: Sure! Let’s assume:

• High = 100
• Low = 50
• Price range = 50

To find the 61.8% retracement level:

• 50 × 0.618 = 30.9
• 100 - 30.9 = 69.1

Other Fibonacci levels can be calculated in the same way.

Using Fibonacci Retracement in Daily Trading

Previous Day High & Low Strategy

Tamili: How can I use Fibonacci Retracement for daily trading?

Parkavi: Follow these steps:

1. Mark the previous day’s high and low.
2. Buy signal: If the price breaks above the previous day’s high.
3. Sell signal: If the price falls below the previous day’s low.

0.618 Level Strategy – The Key to Winning Trades

Tamili: You mentioned 0.618 is important. How can I use it?

Parkavi:

• If the price breaks above 0.618 level, it indicates an uptrend, and you can go long.
• If the price falls below 0.618 level, it signals a downtrend, and you can go short.

Example:

• Previous day high = 120, Low = 80
• 0.618 Level = 95

So,

• Buy above 95 (Stop-loss at 85, Target at 110)
• Sell below 95 (Stop-loss at 105, Target at 85)

Risk Management – Trade Safely

Tamili: How can I manage risk while using Fibonacci levels?

Parkavi: Risk management is crucial in trading.

Entry Strategy

• Always wait for a confirmation candle before entering a trade.

Stop-Loss Strategy

• For long trades: Place the stop-loss below the previous swing low.
• For short trades: Place the stop-loss above the previous swing high.

Exit Strategy

• First target: Next Fibonacci level (0.5 or 0.382).
• Second target: Previous day high/low or a strong resistance zone.

Conclusion – The Power of Fibonacci in Trading

Tamili: Wow! Fibonacci Retracement is such a useful tool for trading. Thanks, Parkavi!

Parkavi: Absolutely! Start practicing and applying it in your trades. In the next session, we’ll see how to use it on real-time charts.

Tamili: Sounds great! Friends, if you found this strategy helpful, don’t forget to like, share, and subscribe! 😊

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Discover how Fibonacci Retracement helps traders identify support and resistance levels in the stock market. Learn how to calculate Fibonacci ratios (23.6%, 38.2%, 50%, 61.8%, 78.6%), use the 0.618 level trading strategy, and apply risk management techniques. Perfect for intraday and swing trading!

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