Fibonacci retracement methodology is perceived to be one of the most advanced tools that professional traders use for speculating the markets.
It is not that simple though as the proper mastery of the Fibonacci indicator is needed.
Fibonacci was initially created by an Italian mathematician Leonardo of Pisa, known as Fibonacci.
At the back-end of this indicator, there is a sequence where the addition of the previous two numbers is the outcome of the next number of the equation, and so on.
Furthermore, every trader uses this tool or indicator differently, but the theory remains intact.
Fibonacci: The 61.8% magic retracement level
The majority of traders use Fibonacci to identify the retracement areas of support and resistance levels.
The magic number is the 61.8% where, when the price drops or rises to a given support or resistance zone, the instrument is then expected to retrace to the opposite direction, rise or fall respectively.
Therefore, the traders wait when the price will drop and hit a support zone to place their buy order, and triggering a sell order after the price rises and hits a resistance level.
Once a trader identifies the parameters in setting up his or her Fibo tool, either automated or manual, the next step is setting up the risk and money management, and exit criteria.
The exit criteria could be either based on the standard parameters, such as the stop loss and take profit, or the Fibo levels.
The main psychological levels that traders usually pay attention to, apart from the 61.8% level, are the 0.0%, the 23.6%, and the 100.0% zones.
The 0.0% represents the stop loss level for a buy order and the take profit target for a sell order.
Alternatively, the 100% level can be used as a take profit and a stop loss target for a buy and a sell order respectively.
Remember that the repetition of your strategy, at all times, is a critical element for success.