What are Fibonacci Levels?
Fibonacci levels and sequences do not harbor elusive ratios or hidden price patterns inherent in the market’s fabric. Instead, they represent a widely embraced method or indicator for analyzing price action in financial markets. Similar to other popular indicators, their significance stems from their self-perpetuating popularity.
Fibonacci levels can be classified into two categories: retracements and extensions. Retracement levels come into play after an asset establishes a new high during an uptrend or a new low during a downtrend. Traders identify these levels when they perceive a temporary end to a trend and the onset of market consolidation. These phenomena are known as Fibonacci retracement levels.
Key Fibonacci Retracement Levels: 0.236, 0.382, 0.500, 0.618, 0.764
On the other hand, Fibonacci extension levels are employed to ascertain the continuation of a trend. While market prices may correct to one of the Fibonacci retracement levels (but not necessarily), they eventually resume their movement in the direction of the underlying trend, marking new highs or lows. In some cases, prices may proceed along the main trend without touching any Fibonacci retracement levels after a consolidation period.
Key Fibonacci Extension Levels: 0.382, 0.618, 1.000, 1.382, 1.618
Similar to the absence of a magical or universally applicable principle governing the Golden Ratio, there exists no mystical or universally binding law surrounding Fibonacci ratios. These ratios are merely intriguing mathematical discoveries that have found practical utility among traders.
Traders worldwide have been captivated by the enchanting allure of Fibonacci ratios in the market. Due to their widespread adoption by numerous professional traders who buy and/or sell at these levels, Fibonacci levels have proven to be highly effective.
Step-By-Step guide on using the Fibonacci Levels Calculator:
Trend Direction: In this field, traders can simulate an uptrend or a downtrend by selecting “Up” or “Down.” For example, let’s calculate Fibonacci retracements for the EUR/USD, which is currently in an uptrend on the weekly chart, aiming to identify a suitable entry level.
Firstly, for our example, we select the “Up” trend direction. Next, we check the “Retracement” radio button to instruct the calculator to compute the retracement levels.
Low Price: Enter the lowest price of the EUR/USD pair observed at the beginning of the uptrend. For instance, let’s use 1.16653.
High Price: Input the highest price reached by the EUR/USD pair during the ongoing uptrend. As an example, let’s use 1.20552.
After entering the required data, click the Calculate button.
The Results: The Fibonacci Levels Calculator will swiftly calculate and display the five retracement levels for the EUR/USD pair. These retracement levels are determined by taking the two extreme points (lowest or highest swing, referred to as point A and point B) of the asset’s price action and dividing the vertical distance by the key Fibonacci ratios: 23.6%, 38.2%, 50%, 61.8%, and 78.6%.
In our example, during the uptrend, the lowest swing for the EUR/USD (point A) was 1.16653, while the price action peaked at 1.20552 (point B). After inputting this data, the calculator reveals the Fibo retracement levels, such as 1.1987 for the 23.6% retracement, 1.1944 for the 38.2% retracement, 1.191 for the 50.0% retracement, and so forth.
The calculator will display the retracement levels by default. To view projection (extension) levels, traders need to provide the “End price” (required), upon which the calculator will exhibit up to six potential projection levels, with a maximum of 261.8% (2.618 Fibo).
The three most popular Fibonacci retracement levels in financial trading are 23.6% (0.236), 38.2% (0.382), and 50% (0.500). The three Fibonacci extension levels that are most frequently employed in financial trading are 61.8% (0.618), 100% (1.000), and 161.8% (1.618).