Retracement meaning! This can be a minor pullback or temporary change in direction of financial instruments eg, Crypto Currency, Stocks, Foreign Currency, Commodities & derivatives, etc.
In this article, we will be emphasizing solely Retracement and its Meaning which will enlighten you on why and how essential it is for every trader to understand how to identify retracement using support and resistance levels.
Table of Contents
- What Is Retracement?
- Understanding retracement
- How to identify retracement using Fibonacci
- Trading retracement using Fibonacci levels
- Conclusion
The term retracement is specifically a terminology used by technical analysts or investors when a market counter-trends during analysis.
What Is Retracement?
The term retracement meaning in finance refers to a particular or complete reversal of the price of a commodity, stock, currency pair, or derivatives from its original trend thereby creating or forming a temporary counter-trend. Retracement is temporary in nature and does not indicate a shift in the current larger trend.
Understanding retracement
let’s assume the Eur/Usd currency pair increased by 20% over the course of one week, Any investor/retail trader who analyzes the chart using a trend-line knows the price of the currency pair is unlikely to rise continuously throughout the week.
The duration of the time in which the currency or commodity price decreases, despite the overall upward trend for the week is considered generally a trend retracement or pullback.
Recognizing price retracement is crucial for retail traders or investors who perform technical analysis on stocks, Commodities, Currency pairs, and tons more.
How to identify retracement using Fibonacci
In finance Fibonacci retracement as the name implies is a technical tool used by technical investors/analysts for determining the support and resistance levels of a commodity.
It uses a Fibonacci sequence of numbers whose ratio provides potential price levels to which markets tend to retrace after a portion of a move before the trend continues in its original direction, this could be an uptrend or a downtrend.
A Fibonacci retracement forecast is created by picking extreme points, Peak formation high(PFH), and Peak formation low(PFL) on a chat thus dividing the vertical distance by the Fibonacci ratio. In Fibonacci retracement, 0% is considered to be the start of the resistance, while 100% is a complete reversal of the initial price before the move.
Horizontal lines are drawn in the chats for these price levels to identify support and resistance levels, the common Fibonacci levels are 23.6%, 38.2%, 50%, and 61.8%. Additionally, the Fibonacci retracement tool is mostly used by investors /technical traders which helps them identify strategic places/price levels for the transaction, stop losses, and target prices.
Trading retracement using Fibonacci levels
In commodity, Stock, Forex, and derivatives trading, Fibonacci retracement levels Meaning is simply utilized in two steps process.
During Uptrend
- Identify the direction of the market trend, this step is performed on a higher time frame for proper trend identification.
- Attach the Fibonacci retracement tool on the candle stick wick which made the peak formation low(PFL) or on the swing lows, then drag it all the way to the top of the candle stick wick that formed the peak formation high(PFH) or higher highs.
- Pay close attention and monitor the three potential support levels of 0.23, 0.382, 0.50, and 0.618 where the price is anticipated to bounce off by the majority of investors/retail traders.
During Downtrend
- Identify the direction of the market trend, this step is performed on a higher time frame for proper trend identification.
- Attach the Fibonacci retracement tool on the candle stick wick which made the peak formation high(PFH) or on the swing highs, then drag it all the way to the bottom of the candle stick wick that formed the peak formation low(PFL) or lower lows
- Pay close attention and monitor the three potential support levels of 0.23, 0.382, 0.50, and 0.618 where the price is anticipated to bounce off by the majority of investors/retail traders.
Conclusion
Every retail trader/investor specifically beginners dreams of mastering the Fibonacci Retracement theory whose Meaning is vital for trend retracement identification. The majority of investors/retail traders make good use of it to identify potential support and resistance levels on the price chart which may suggest that a reversal is in play.
However, it is better to look for additional confluence using Japanese candlestick formation for reversal signal and oscillators crossing the baseline or a moving average for confirmation
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“Chinedu is a forex/stock Trader, and content writer, With a passion for educating others about the financial markets. He works tirelessly through his writing to share insights and knowledge from years of experience trading in the financial market. He is dedicated to providing valuable information on what works and what doesn’t.