Technical Analysis : Part 8 ( Fibonacci Retracement)

Fibonacci Retracement:

• It is identified by mathematician Leonardo Fibonacci in the 13th century.
• Fibonacci sequence is the sum of the two preceding number. The Fibonacci numbers are: 0,1,1,2,3,5,8,13,21,34,55,89,144 etc .
• The characteristics of this numerical sequence is that each number is 1.618 times (approx) greater than the preceding number.
• Fibonacci ratios are 23.6%, 38.2%, 61.8%, 100% and 61.8% is also referred as " the golden ratio" or "the golden mean".
• Fibonacci retracement is created by taking two extreme points ( peak and trough) and dividing the vertical distance by fibonacci ratios to identify support and resistance.
• This tool is used for intra-day, short-term and long-term.

 

•  Above is the daily chart of TSL ( Trina Solar Ltd).
• R1, R2 and R3 indicates the resistance level at 61.8%.
• There is sharp fall in price after testing the resistance level of 61.8%.
• Many traders even use 50% and 78.6% retracement levels for analysis.
• 50% retracement level is used because of the overwhelming tendency for an asset to continue in a certain direction once it completes a 50% retracement.
• 78.6% level is used in commodity market because of high volatility.