Fibonacci Retracement

• Technical analysts use Fibonacci retracement levels of 23.6 percent, 38.2 percent, 50 percent, 61.8 percent and 100 percent of the distance between the low and the high of an asset's most recent price gain or loss. Analysts draw a trendline between two extreme price points and divide the vertical distance between the high and low price by the Fibonacci ratios. Fibonacci retracement levels appear as vertical lines across a daily price chart. For instance, a 100 percent Fibonacci ratio signifies a retracement to the asset's original price or starting point.
  
  

Support and Resistance

• Day traders draw Fibonacci retracement levels to help them identify an asset's support and resistance levels. Support refers to the point at which buyers step in to purchase the asset, preventing it from setting a new intraday low, or declining further. On the other hand, resistance refers to the point at which selling occurs preventing an asset from making a new intraday high, or increasing further in price. For instance, if a stock trades near the 50 percent Fibonacci ratio, a trader may place a buy order expecting the stock price to move above the 50 percent retracement level, with a target price near the 61.8 percent retracement level.
  
  

Stop-Loss

• As with support and resistance levels, traders use Fibonacci retracement to place stop-loss orders. A stop-loss is the maximum acceptable loss. For example, a trader may place a buy order at a price entry point slightly above the 50 percent Fibonacci retracement level, with a stop-loss order exactly at the 50 percent ratio to minimize his loss, should the stock price fall below that level.
  
  

Insight

• Fibonacci retracement is one of many technical analysis tools. However, day trading is both an art and science. Technical analysts use past price performance to determine future price movement. To the chagrin of many day traders, past price performance is just that -- the past. In addition, day traders use many different technical indicators to formulate their trading strategies, with some finding Fibonacci retracement useful, but others preferring other forms of technical analysis. No technical indicator is superior to any another, and day traders tend to focus on more than one at a time, only making a trading decision if several indicators lead to the same conclusion.