Every instrument moves in trends. And every trend move will have an impulsive or a corrective move. When the security moves in the direction of the trend it is called an impulsive move. When the security moves in a corrective phase then it is called a pullback.
The pullback happens in all securities and after the pull back the security starts to move in the direction of the earlier trend. The Fibonacci indicators basically are used to understand what level the pullback could happen to help you enter the trade.
The history of Fibonacci
Fibonacci levels have been derived from the Fibonacci sequence of
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89…
This is where the new number is basically the sum of the previous two numbers. When the sequence proceeds then the number is approximately 61.8% of the next number and 38.2% of the following number approximately. It is approximately 23.6% of the next number after that. It is these percentages that are used by technical analysts to understand what level the pullback could happen.
How are Fibonacci levels relevant to the stockbroker?
The Fibonacci levels, full review, are used and are relevant to the technical charts. This is used when one can see a significant up move or a down move in the price chart. When the stock moves either upwards or downwards in a sharp way then it will retract back to a Fibonacci level before it starts its next move.
The retracement levels are used to forecast up to which level the retracement may happen. This level is used by traders to get into the trade and the direction of the trend. The Fibonacci levels let the trader know what could be the possible extent of the retracement and this will help him to enter the trade.
Way do technical analysts use Fibonacci Indicators?
The Fibonacci numbers are prevalent in all the spiral shapes that are found in nature. This includes flowers and constellations too. When the spiral grows the percentage is the same as a Fibonacci ratio.
These ratios are not just restricted to shapes but also predict what human behavior could be.
And this is why Fibonacci levels are used so widely in technical analysis because at the end of the day technical analysis is about human psychology and how the human mind reacts to different market conditions.