The Auto Fib Retracement Indicator was developed in reference to the theory that markets retrace a forecasted period of a specific move and revert to its original direction. The indicator was designed for a more informed technical analysis to have a more profound understanding and define support and resistance levels.
While trading, traders employ the use of various indicators with the objective of making profits and using the indicators, it is easy to know the support they can get during trading and the resistance they might experience. The indicator has two points that are used during implementation that inform on the usage of the indicator. (Click this link to access an economic calendar for your trading strategies )
• The indicator makes use of the Fibonacci sequence
• Uses horizontal lines to determine levels of support and resistance.
• Fib Retracement tool is used in setting the two points
• Uses the ratios of 23.6%, 38.2%, 50%, 61.8%, and 100%
Using Fibonacci Ratios
Derivation of the ratio uses the principle of adding two preceding numbers. This unique characteristic ensures that each number is 1.618 times greater than the previous number. This defines the basic principle in which traders apply the ratios.
• Fibonacci of 61.8% is derived after dividing a number by the following number.
• The 38.2% is derived after dividing a number by the one-two spots to the right.
• The 23.6% is derived after dividing a number by a third-placed number to the right.
Application of Fibonacci Retracement
Many traders believe that these ratios play a very crucial role in the market. The indicator is the most widely used of all Fibonacci tools because they are easy to use and can be applied in almost any market. They offer support in drawing support lines, determining resistance levels, and setting target prices.
Differences between Fibonacci Retracements and Fibonacci Extensions
With the application of the retracement levels, it is easy for traders to understand the deepness through which a retracement could go clearly. On the other hand, extensions show traders the direction of the price when a retracement occurs.
Limitation of Fibonacci Retracement
Many traders are attracted to indicators because of their mathematical-oriented background, which shows a specific numerical implication in the market. The primary application of any Fibonacci tool is that there is no logical proof of any numerical principle. Fibonacci Retracement may not be their favourite for the traders who rely on the rationale behind a trading strategy.
In conclusion, Fibonacci retracement is one of the most common technical trading indicators that can guide a trader on when to enter a trade. After noticing a significant momentum, a trader can speculate that the stock will then retrace. For more trading insights, subscribe to tradingview.com and join other traders in the discussion.