The Fibonacci Retracement tool is a very common tool that investors use in both the equity market and the cryptocurrency market. This tool helps in determining the points for selling and locking in positions.
What is the Fibonacci Retracement Tool?
The Fibonacci Retracement Tool is a technical analysis tool that helps identify the key areas of support and resistance in a given chart. Fibonacci retracement levels show horizontal lines that indicate areas of support and resistance before the trend continues on along the original direction. These levels are identified by creating a trendline between the high point and the low point, and then dividing the vertical length by the Fibonacci ratios of 23.6 percent, 38.2 percent, 50 percent, 61.8 percent, and 100 percent.
How to Setup the Fibonacci Retracement Tool?
Depending on the interactive chart platform that you are using, the setup of the Fibonacci Retracement Tool varies. Generally, you select the Fibonacci Retracement Tool option from the selection of technical analysis tools.
The important thing to note is to plot the Fibonacci Retracement Tool on the chart starting from the bottom of the past pull back to the peak of the recent high. Remember to select the highest and lowest points and include the wicks not just the candles. Once the tool is perfectly positioned, the Fibonacci Retracement Tool auto-computes the key resistance and support lines using the Fibonacci ratios.
Mastering the use of the Fibonacci Retracement Tool gives investors a step ahead of when institutional investments may come. The institutional investments are the big investments that could affect the market significantly. Since most institutions base their assessments for entry points and sell-off points on the Fibonacci Retracement, this tool could essentially help retail investors in their decision makings.
Basic knowledge of the technical analysis tools could go a long way for you if you do it right. Trade wisely!