Analytical traders can wait until a particular stock can correct itself and settle down to a stable sale price. Due to market volatility, it is essential that a trader takes the values of 23.6%, 38.2%, and 61.8% into account before deciding to settle on a certain price to buy or acquire stocks.
There is no set formula to calculate Fibonacci retracement.
Instead, a trader simply chooses two points between the highs and lows of a stock’s price bands. Lines at percentages of Fibonacci retracement numbers are then plotted on the graph.
For instance, a trader can select a stock whose price has ranged between Rs. 100 and Rs. 150 on a trading day. The ‘retracement indicator’ can be calculated from these 2 price points. The 23.6% levels will be Rs. 138.2 or 150 (50 x 0.236). The next lines can be plotted likewise.
A trader who is using Elliot Wave Theory or Gartley Patterns in plotting the average rise and fall in stock prices can also use a Fibonacci retracement.
Although no sensible brokerage house relies solely on a Fibonacci retracement to identify a certain stock’s ‘call’ levels, it is a strong contributor. Both inter-day and intra-day trading of any stock can follow a noticeable Fibonacci sequence.
Whenever there is a strong upward or a negative/downward trend in a stock’s price, Fibonacci retracement levels are often noted. Also, any stock whose price is on a noticeable high run may retrace back once before moving again on the bourses.
For example, if a stock is priced at Rs. 50 is currently moving up towards Rs. 100 or more, there is a high probability that it will first retrace to Rs. 70, thereby experiencing a negative curve, before reaching highs of Rs. 120 and above.
- Fibonacci retracement levels connect any two points that the trader views as relevant, typically a high point and a low point.
- The percentage levels provided are areas where the price could stall or reverse.
- The most commonly used ratios include 23.6%, 38.2%, 50%, 61.8%, and 78.6%.
- These levels should not be relied on exclusively, so it is dangerous to assume that the price will reverse after hitting a specific Fibonacci level.
- Fibonacci numbers and sequencing were first used by Indian mathematicians centuries before Leonardo Fibonacci.
Limitations of Use in Real-World Situation
There are several limitations of Fibonacci retracement indicators in real-life stock exchange uses. The following are the most prominent ones
- It must be remembered that Fibonacci retracement indicates only static price levels. It is impossible to say for sure that a certain stock’s price will not exceed or stay below-predicted levels.
- Ultimately, many extraneous factors also determine the price of a stock. They have to be taken into account when determining their future.
- Since Fibonacci retracement levels are pretty close to each other, it is often tough for a master stockbroker to determine the accurate platform from which to predict a certain stock’s future.
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