To make their work in the financial market easier and minimize the number of wrong decisions, traders use technical analysis indicators. One of the most common and significant in the industry is a tool called the Fibonacci levels. With its help, you can predict a price retracement.
Experts say that in order to make technical indicators work, you need to learn how they really work and find one-size-fits-all formulas for combining them. As for the Fibonacci levels, many books and tutorials have been written about this indicator, but to get started with it, all you need to do is understand a few rules, namely:
Despite an immense amount of information on this indicator, it is, in fact, extremely difficult to find a clear-cut algorithm for setting up the tool, although in practice even novice traders can cope with the task. You can set up the levels in just a few clicks:
In the event of a downward movement, you need to select the maximum point and draw a line to the minimum one. If the price reaches a new maximum, the grid has to be dragged along, and the minimum point will not need to be changed.
In order to understand when to use this indicator and what it can help you with, you may wish to consider a simple example. Suppose that you see a trend on the chart that is constantly moving upward, and you decide to purchase an asset, be it a currency pair or a stock. At the same time, you understand that you can run into losses, because you do not know for sure when a reversal will occur and the price will start to move downward, making your investment unjustified.
It is in order to find the best moment to enter the market that the Fibonacci indicator is used. With its help, you can determine how much the price has decreased against the main trend in percentage terms.
According to statistics, you can achieve the greatest trade efficiency entering the market when the price touched levels of 23.6%, 38.2%, and 50%.
Most often, this indicator is used to determine the correct time to enter a trade. Some use the tool to determine where to set their profit and stop loss. In this case, the principle remains the same, and the points themselves are considered the most favorable levels when forming trade boundaries.
Any technical analysis tool allows anyone to make one’s own purely subjective judgment on the situation. Seeing the same chart, each trader creates one’s own strategies and comes to different conclusions. The minimum and maximum points can be set at different levels, especially when working with long-term trends.
In addition, it should be noted that it is pointless to use this tool without other indicators since you will not be able to objectively assess what is happening in the market. Fibonacci levels help only to determine a trend retracement, and you will need much more information is needed to increase the probability of a trade being successful.