# What Fibonacci Retracement Indicates in Technical Analysis

## Trading Basics: Fibonacci Marks

**Trading Basics: Fibonacci Marks**

**Fibonacci applications** in technical analysis is a topic that divides the trading community. One camp sees it as useless hocus-pocus that only works occasionally by chance. Proponents argue that certain Fibonacci relationships can be used to derive sensible trading setups - albeit on a more discretionary basis, i.e. with the inclusion of the **Framework** and the **Trader's experience**.

But what are these ominous ones **Fibonacci Relations** at all? To do this, we have to briefly look at the basis of it all, namely the Fibonacci number sequence. This was officially documented by Leonardo Fibonacci more than 800 years ago. The whole thing is based on a very simple calculation concept: The series begins with the numbers 0 and 1; all following numbers are then calculated from the sum of the last two.

The 3rd digit of the sequence is therefore 0 + 1 = 1. The 4th digit 1 + 1 = 2. The 5th digit 1 + 2 = 3. Then 2 + 3 = 5. And as the 7th digit 3 + 5 = 8. And so on. Taken in and of itself, it doesn't seem like anything special. But studies from different areas of nature have shown that certain relationships between these numbers occur again and again, for example in the structures of plants.

Fibonacci proponents extrapolate the whole thing **Stock market prices**. The argument: If the relationships occur frequently in nature, why not also in the courses? So you investigate to what extent certain relationships of the numbers to one another are reflected in the formation of highs and lows.

Let's look at a simple example. The quotient of one Fibonacci number and the next approaches 0.618. This ratio can be applied to a price movement as follows. If the price of any value rises impulsively from 100 euros to 200 euros and then a setback begins, this could correct exactly 61.8% of the previous upward movement - i.e. up to 138.20 euros - before the upward trend continues. The reciprocal value is also possible: 1 - 0.618 = 0.382. Even after a correction of only 38.2% - i.e. at 161.80 euros - the price could turn up again. Another brand that is often noticed is the 50% retracement, in this case at 150 euros.

Here we are already one **Application problem** clear. Even if you believe in technology and a reversal in you **Fibonacci retracement** expected, it remains unclear at which of the brands mentioned this happens. Sometimes you have to start several attempts, each with tight stops.

In addition to the **Retracements** is there** Fibonacci extensions**. These are projections based on an initial movement that show where the price could still go (and where profit-taking or counter-trend trades are appropriate). Often used examples are 161.8% and 261.8% of the initial movement.

Experience has shown that Fibonacci relations work particularly well in clusters. This means course marks at which the relations of different time levels overlap. Such a Fibonacci cluster arises, for example, when the 38.2% retracement on the daily chart shows (almost) the same price mark as the 50% retracement on the 1-hour chart. If even 3 time levels come together - for example an additional 61.8% retracement on the 15-minute chart - the probability increases further that there will be at least a temporary turnaround in this area.

Here comes that too **Trader's experience** in the game. Experience has shown that the chances are good, especially when the course has been running in the same direction for several days and, from a technical point of view, there “has to” be a countermovement anyway. Ideally, Fibonacci marks can be an excellent tool for identifying worthwhile entry and exit marks.

The discretionary component is and will remain the difficulty with Fibonacci tools. The techniques are difficult to understand objectively, let alone prove statistically. For this reason, Fibonacci instruments are likely to continue to be controversial. Who knows, maybe that's the big advantage of the approach.

**B1) Fibonacci retracement in the DAX**

After the sell-off in August 2015, an upward movement began in September, leading from the low of 9,302 points to 11,432 points. In the subsequent correction, the DAX fell on December 14th. in the low to 10,121 points - almost exactly on the 61.8% fibonacci retracement, which was 10,116 points (see marking) - and rose significantly in the following days. A few days earlier, the 38.2% retracement was hit almost exactly.

Source: WH SelfInvest, Nano Trader

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