Fibonacci Retracement Tool
The Fibonacci Retracement Tool is an easy charting tool to learn, but requires practice to master its price projection power. Like most Fibonacci Tools, knowing where to place the anchor points of a Fibonacci Retracement Tool on a stock chart is the key part of using the tool.
A Fibonacci Retracement Tool is best used at the beginning of a potential pullback. Once placed, the tool will identify key areas where the stock's share price should find support during its pullback.
The identification of support levels can aid in the decision to hold or to sell shares. It can also help to estimate the depth of the upcoming correction or pullback that is anticipated.
In more advanced applications, the Fibonacci Retracement Tool can also be used to calculate upside price targets (see the tips & warnings section).
The Fibonacci Retracement Tool is similar to the Fan Tool in that it is easy to place on a stock chart. The various components for a Fibonacci Retracement Tool include:
- 2 Anchor Points - Anchor Points are used to place the Fibonacci Retracement Tool on a stock chart.
- Retracement Lines - The Retracement Lines are automatically calculated and drawn after the 2 Anchor Points have been placed on the stock chart. The Retracement Lines calculated and automatically drawn are:
- 23.6% *
- 61.8% (phi)
- 78.6% *
- 161.8% (Golden Ratio) *
- 261.8% *
- 23.6% *
* Not shown on the below illustration - see the tips & warnings section
Just like the other Fibonacci Charting Tools I cover, the Fibonacci Retracement Tool can be used on candlestick charts covering different lengths of time such as 5 minute charts, hourly charts, daily charts, weekly and even monthly charts. I find the Fibonacci Retracement Tool to be equally effective when used on any of these time frames.
Pull up a candlestick chart.......If you want to continue learning about things like:
- the components of a Fibonacci Retracement Tool
- how to use the tool to monitor pullbacks and calculate support areas
- advanced techniques, like how to use a Fibonacci Retracement to estimate upside price targets
- tips and warnings when using this tool
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