Fibonacci retracement

Technical analysis method (Finance) / From Wikipedia, the free encyclopedia

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In finance, Fibonacci retracement is a method of technical analysis for determining support and resistance levels.[1] It is named after the Fibonacci sequence of numbers,[1] whose ratios provide price levels to which markets tend to retrace a portion of a move, before a trend continues in the original direction.

Fibonacci retracement levels shown on the USD/CAD currency pair
Fibonacci retracement levels shown on the USD/CAD currency pair. In this case, price retraced approximately 38.2% of a move down before continuing.

A Fibonacci retracement forecast is created by taking two extreme points on a chart and dividing the vertical distance by Fibonacci ratios. 0% is considered to be the start of the retracement, while 100% is a complete reversal to the original price before the move. Horizontal lines are drawn in the chart for these price levels to provide support and resistance levels. Common levels are 23.6%, 38.2%, 50%, and 61.8%. The significance of such levels, however, could not be confirmed by examining the data.[2] Arthur Merrill in Filtered Waves determined there is no reliably standard retracement.[3]

The appearance of retracement can be ascribed to price volatility as described by Burton Malkiel, a Princeton economist in his book A Random Walk Down Wall Street.