# How to Use Fibonacci Retracements

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.

## Downtrend

• 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

1. 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.
2. Ultimately, many extraneous factors also determine the price of a stock. They have to be taken into account when determining their future.
3. 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.