Fibonacci retracement levels can be extremely powerful and critical for swing trading. There are both fibonacci retracement and fibonacci extension levels. However, the ones that play a major importance in swing trading are fibonacci retracement levels and as such will be the focus of this article. Below you will find a brief explanation of each of the most common fibonacci retracement levels.
What are fibonacci retracement levels? A retracement is a price movement in the opposite direction of the previous trend. Fibonacci refers to a number sequence prevalent in nature that shows trends that adhere to certain percentages. It is believed that through the use of fibonacci ratios, one can find levels that price will retrace to and possibly bounce before continuing on with the trend.
The fibonacci retracement price levels are 0.236, 0.382, 0.500, 0.618 and 0.764. Your trading software should be able to automatically plot these price levels on your chart. These retracement levels are important because they are used as possible areas of support and resistance. The use of fibonacci levels are so widespread that traders all over the world implement these levels on their charts. In an uptrend, the basic concept is to go long on a retracement back to a fibonacci support level and in a downtrend to go short on a retracement back to a fibonacci resistance level.
Of all the fibonacci retracement levels, the 0.236 is the weakest. The use of fibonacci levels are far from perfect and a swing trader must always use them with caution. However, this should not distract you from keeping an eye out for the possibility of price bouncing at these levels and offering you a chance to enter before price continues with the major trend.