Retracement is a term used in forex trading that refers to the temporary reversal of an asset’s price movement, which occurs during a larger trend. Retracements are often seen as price corrections or pullbacks, and they are a common occurrence in trending markets. In other words, retracements are temporary reversals that happen within a larger trend.
Retracement levels are significant because they provide traders with an opportunity to enter the market at a better price. They also help traders to identify potential support and resistance levels, which can be used to set stop-loss orders and profit targets.
Retracement levels are calculated using Fibonacci retracement tools. These tools use the Fibonacci sequence to identify potential support and resistance levels. The Fibonacci sequence is a series of numbers in which each number is the sum of the two preceding numbers. The sequence starts with 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181, 6765, and so on.
The retracement levels are calculated by taking the high and low points of a trend and dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8%, and 100%. These ratios are used to identify potential support and resistance levels.
For example, if the price of a currency pair is trending upwards, the retracement levels can be identified by taking the high and low points of the trend and dividing the distance by the Fibonacci ratios. If the price retraces to the 38.2% retracement level, it is likely to find support at that level. If the price retraces to the 61.8% retracement level, it is likely to find strong support at that level.
Retracement levels can also be used to identify potential resistance levels. For example, if the price of a currency pair is trending downwards, the retracement levels can be identified by taking the high and low points of the trend and dividing the distance by the Fibonacci ratios. If the price retraces to the 38.2% retracement level, it is likely to face resistance at that level. If the price retraces to the 61.8% retracement level, it is likely to face strong resistance at that level.
Traders can use retracement levels to set stop-loss orders and profit targets. For example, if a trader enters a long position at the 38.2% retracement level, they can set a stop-loss order just below the 50% retracement level. This ensures that if the price retraces further, the trader’s losses are limited. The trader can also set a profit target at the 61.8% retracement level, which is likely to provide strong resistance.
In conclusion, retracements are temporary reversals that occur within a larger trend. They can be used by traders to identify potential support and resistance levels, set stop-loss orders, and profit targets. Retracement levels are calculated using Fibonacci retracement tools, which use the Fibonacci sequence to identify potential support and resistance levels. As with all trading strategies, it is important to use retracement levels in conjunction with other technical and fundamental analysis tools to make informed trading decisions.
