The topic of fibonacci retracement is quite intriguing. To fully understand and appreciate the concept of Fibonacci retracements, you need to understand the Fibonacci series. The origins of the Fibonacci series can be traced back to ancient Indian mathematical scripts, with some claims dating back to 200 BC. However, in the 12th century, Leonardo Pisano Bogollo, an Italian mathematician from Pisa, known to his friends as Fibonacci, discovered the sequence of Fibonacci numbers.
It is believed that Fibonacci ratios, that is, 61.8%, 38.2% and 23.6%, find their application in stock charts. Fibonacci analysis can be applied when prices move up or down noticeably. Whenever a stock moves sharply up or down, it usually tends to pull back before the next move. For example, if a stock rallied from Rs 50 to Rs 100, it is likely to retrace to probably Rs 70 before moving Rs 120.
Recovery Rate Prediction is a method that can determine to what level recovery can occur. These retracement levels provide traders with a good opportunity to enter new positions in the direction of the trend. Fibonacci ratios, that is, 61.8%, 38.2% and 23.6%, help the trader to determine the possible degree of retracement. A trader can use these levels to position himself for a trade.
As we now know, fibonacci retracement is movement on a chart that goes against the trend. To use Fibonacci retracement levels, we must first identify the 100% Fibonacci move. 100% movement can be upward or downward. To mark 100% movement, we need to select the most recent peak and trough on the chart. Once this is found, we connect them using the Fibonacci retracement tool. This is available in most technical analysis software packages including Zerodha's Pi.
Here's a step-by-step guide:
Step 1) Identify the immediate peak and trough. In this case, the trough is at 150 and the peak is at 240. The 90-point shift is 100%.
Step 2) Select the Fibonacci retracement tool from the chart tools.
Step 3) Use the Fibonacci retracement tool to connect the trough and peak.
After selecting the Fibonacci retracement tool from the charting tool, the trader must first click on the bottom, and without lifting the click, he must drag the line to the peak. At the same time, Fibonacci retracement levels begin to appear on the chart at the same time. However, the software completes the retrace identification process only after both the trough and the peak are selected. This is how the diagram looks after selecting both points.
