Fibonacci Retracements have become one of the most popular trading methods and can be a beneficial part of your trading strategy. While their name may be intimidating, Fibonacci Retracements are actually rather simple to understand and can be useful for beginner investors as well as more seasoned pros.
What Are Fibonacci Retracements?
With any type of investment, it’s possible to track the price of a monetary instrument using a price versus time chart. In the chase of trading success, these types of charts make it possible to easily see the high and low price points that a particular underlying asset has reached within a given time frame.
With Fibonacci Retracements, you place horizontal lines on a price versus time chart at the high and low price points. One line is placed at the 0 percent mark and another is put at the 100 percent mark. Then three more lines are put on the chart at the 38.2 percent, 50 percent and 61.8 percent locations. The percentage points are always the same no matter what the price range is or what type of asset you’re plotting.
Research indicates that when the price of an asset moves up or down, the support and resistance points will remain closely positioned to these lines. When you add Fibonacci Retracements to a financial chart, it becomes easier to predict how pricing might move in the future.
Benefiting from Fibonacci Retracements on trades
The Fibonacci Retracements help with predicting changes in the price of an asset and can help you to determine when the timing is ideal for purchasing a stock or exiting a trade early. As an example, say you were tracking the price of gold during a downward trend in gold prices that has gone about as low as the 0 percent mark. You can anticipate that the price will now rebound but will only go up as high as the Fibonacci Retracements.
An Important Thing to Remember About Fibonacci Retracements
Fibonacci Retracements can help you predict market behavior with a good degree of accuracy, but they are by no means foolproof. The markings on the financial charts have been shown to be a good way to establish past trends, but the future of markets is always uncertain.
In some cases, the lines may need to be adjusted to better reflect the behavior of an asset’s price. Seasoned investors typically have an easy time spotting these instances, but it can take beginners some time to master the skill. Market volatility also makes it impossible for any one trading method, including Fibonacci Retracements, to be reliable 100 percent of the time. There are always external factors in play that can make an asset’s price behave in an unexpected way. As a result, it’s best to consider Fibonacci Retracements along with other types of information and to never invest more than you can afford to lose with a trade.
Using Fibonacci Retracements on trading
Fibonacci Retracements can be used to minimize the risk of loss and improve the accuracy of predictions made concerning any type of trade. The Fibonacci Retracements can help you make more educated guesses with High-Low index and Range trades. No matter what type you are considering investing in, it is wise to get some practice by using a demo account along with Fibonacci Retracements. Through trial and error, you can become more familiar with this technical analysis method and start to see when you can rely on the information they provide.