Fibonacci Retracement tools are used to identify key horizontal Support and Resistance levels. Fibonacci Retracement levels are calculated by drawing a trend line between a significant low (represented as a 0% level) and a significant high (represented as the 100% level) and plotting horizontal lines at each of the Fibonacci percentage levels (23.6%, 38.2%, 50% and 61.8%) between those high and low prices.
It is based on theory that if a prices makes a significant move up or down, frequently the price will ‘retrace’ until a new level of support and resistance is found. Fibonacci Retracements are particularly useful in helping to identify where those next support or resistance levels may be.
For example, see euro dollar pair monthly candlestick chart from 1992 to 2018. On char euro made bottom around 0.85 in year 2000 and hit high of 1.58 in 2008. We joined these two extreme points and plotted Fibonacci Retracement which shows. After hitting record high in 2008, euro given sharp correction almost of 50% of total move in 2008 to 2009. Then 1, 2 and 3 are levels suggesting strong support level and continues buying seen around those levels. At 4 we saw classic resistance from 23.6% level and at 5, in 2014, finally 50% support level broken and euro tested 61.8% and lower levels. Then after taking support around 1.05 level in year 2015-16. We saw breakout and hit target levels of 1.13 and 1.21. And now moving towards 38.2% level which is at 1.30 and 23.6% level which is at 1.40. Keep in mind 61.8% level is very crucial in trading and support from his level means definite buy signal with big rally ahead.
Fibonacci retracement tools are widely used by technical analysts and one of the tool for find and draw support and resistance levels.