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How do you use Fibonacci Retracement Tool?
I did a video about this in the past but we did not use the charts and we did not look at what the Fibonacci is. This video, on a contrary, is chart based. I'm using the price chart. It features candlesticks representing where the price has already been. So, in a way, it gives you the visual trail. Price chart also has the potential prices of the currency pair down the right hand side as well as the little white band indicating where the price of the pair is currently at.
Fibonacci Retracement Tool measures pull backs or corrections on the charts. How to use it? Normally, you draw the Fibonacci Retracement Tool from the left hand side to the right hand side. It does not matter if you do an uptrend or a downtrend. That is the way the professional traders do it. When you draw Fibonacci Retracement Tool on a particular market move indicated on the charts, you measure this move . This helps you to ascertain, for example, how far this move is going to pull back, were to stop buying before you a get secondary wave, the secondary move up, etc.
Fibonacci Retracement Tool has a certain levels marked on it. They are 38.2, 50, 61.8, 78.6, 88.6 and 100 These are just percentages of the overall move. Basically, if the price went all the way down to that 100 level it would mean that it have been retraced 100% of the entire move. 61.8 level is the most popular one. It is followed by 50 and 38.2. 88.6 is a really powerful zone that is used quite a lot by the institutional traders. However, there is not that much coverage of it in the retail space.
How to use Fibonacci Retracement Tool levels? Basically you need to look for a confluence of things at these levels. So are you are not just trying to guess at which level the price is going to pull back. You also need to look for other factors overlapping these levels. It could be double zero levels, a lot of traders use 50 levels, moving averages, pivot points etc. Finally, you need to obviously use Fibonacci Retracement Tool in tandem with the fundamentals and the sentiment about the pair you're trading.