Fibonacci retracement is a special theory which carries many controversies with it. It is said that a Vedic formula too involved in Fibonacci retracement which has relation with the whole universe in one or the other way. Above all this, it’s a very successful theory in high volatile markets.
Some ratios are defined in Fibonacci retracement where after a drastic rise of markets, stocks may correct partly, take support at these ratios and again continue its upward trend. In case of drastic fall, stocks may rise – take resistance and continue its travel towards bear side. Widely used retracements are 38.2%, 50% and 61.8%. Also 23.6% and 76.4% are used rarely by some analysts and traders.
Note: Special tool (Fibonacci tool) is provided with charting software with predefined levels 0%, 23.6%, 38.2%, 50%, 61.8%, 76.4% and 100% as shown in the above chart.
There are 2 major applications of Fibonacci retracement where the 2nd one stands tall in its race.
1. Trend reversal
2. Trend continual
As said above, after a drastic fall, it is expected that the stock may take a short reversal till 38.2%, 50% or 61.8% Therefore, in case of trend reversals, these levels are taken into consideration to find how long the reversal is going to last (Below chart). Same with bull markets too.
This is an extension for the above application. This believes in a concept – Upper markets always goes upper and lower markets always goes lower. In detail, after the above short pull back from 38.2% or 50%, the stock continues its original trend to fall further breaking all its support levels – 50%, 38.2%, 23.6% and 0%, tries to make new low(Ref. above chart). Short trade can be taken up at every support break. Especially when the stock cuts its final support level 0%, high chances for the stock to fall much more.
In case of long bull market, market takes a short pull back till 38.2%, 50% or 61.8% as discussed in our first application, again starts flying cutting all its resistances including 0% to make a new high.
Note that these 2 applications are best suitable when the stock declines or advances heavily.