Understanding the use of Fibonacci retracement tool

When you move forward in the trading industry, you will find it more difficult to find the right opportunities to execute your trade and make money. Besides, over time, you may have an increase in your investment. Whenever you are investing a larger amount of capital, the risks become higher. Undoubtedly, as an investor, you will not want to lose your money. That’s why you might need to think wisely and carefully before you decide to execute a deal. You might need to draw some trend lines or support and resistance levels.

At times, you might require to come up with multiple strategies to get in a trade. All of these have some indicators that help you to look out for better chances to make a profit. One such indicator is a Fibonacci retracement which might be the perfect tool for you if you are looking for a better understanding of the market.

What is Fibonacci retracement?

Fibonacci retracements are levels that indicate probable occurrences of support and resistance zones. Here, each of the levels is expressed as a percentage, and based on that percentage, investors get an idea of the levels where the price may get hit after going downward or upward.

As a trader, you might already know the importance of support and resistance in this economy. These levels are very important for you to identify the perfect level for you to execute your trades. The support level is the best time to buy some stocks while resistance is the level that is best for selling them. At the support, the price of a commodity falls the lowest in a trend.

If the trend is an upward one then, support is the place for the highest low while resistance is the level for the lowest low. So, considering that scenario you can have an idea of the opening and closing prices of that certain commodity. Now, price fluctuation may occur several times in a specific time. But support only denotes the lowest price range that took place within that time period.

Practical example

Now, if you buy stocks at the resistance and sell them at the support, you will have a higher cost price than the selling price. Having a higher cost price indicates that you made a loss in that trade. This happens if you don’t look at the charts or a breakout. Let’s say that you bought some stocks thinking that the price would go higher. But instead of going up, the trend went down due to an unexpected situation and as a result, the price of the commodity fell. As it became a downtrend, all the price ranges may remain lower than the amount you invested in buying that stock.

That’s why investors came up with this Fibonacci retracement to let them know the attitude of other traders toward the market. When traders are attracted to the market of a certain commodity, it means that they are willing to invest in that product. As a result, demand increases.

In this indicator, there are five percentage levels; 23.6%, 38.2%, 61.8%, 78.6% and 50% are typically used. If you are new to this indicator, see it here by using the premium platform at Saxo. Many rookie traders in the Mena region has learned to use the Fibonacci retracement tools just with the help of demo account. Once you learn to use it, you can find the end point of retracement.

It is very useful to draw horizontal lines between two price levels (highs and lows) in the charts which will later help to find out the probable support and resistance levels. This indicator has varying uses and can be used to help with anything from setting stop-loss points to setting price targets.

However, there are still some limitations to this indicator as there may be no certainty that the price will hit the resistance or support levels. Using Fibonacci retracement can be a bit risky as it only shows the calculated numbers and the market doesn’t always follow the numbers. That’s why this indicator should never be followed exclusively. As an investor, you need to look at more indicators at the same time to get the legitimate confirmation of the occurrence of the support and resistance levels.