Fibonacci retracement is a popular technical analysis tool used to identify potential support and resistance levels in a given price range. It is based on the Fibonacci sequence, a series of numbers where each successive number is the sum of the two preceding numbers.

The Fibonacci retracement levels are created by taking two extreme points on a chart and dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8%, and 100%. These levels can be used to identify potential support and resistance levels in the market.

When using Fibonacci retracement in technical analysis, traders look for price to reverse after hitting a Fibonacci level. If the price reverses, it indicates that the level is providing support or resistance. If the price continues past the Fibonacci level, it indicates that the level is not providing any support or resistance.

To use Fibonacci retracement in technical analysis, traders should first identify an uptrend or a downtrend in a given price range. Once a trend is identified, two extreme points should be selected. These points could be the highest and lowest points of the trend or any other two points that are significant.

Once the two points are selected, the Fibonacci retracement levels should be calculated. This can be done using a calculator, a charting software, or even by hand. The Fibonacci levels should then be plotted on the chart.

Traders can then look for potential support and resistance levels at the Fibonacci retracement levels. If the price reverses after hitting a Fibonacci level, it indicates that the level is providing support or resistance. If the price continues past the Fibonacci level, it indicates that the level is not providing any support or resistance.

In addition to using Fibonacci retracement levels to identify potential support and resistance levels, traders can also use Fibonacci retracement levels to identify potential entry and exit points. By plotting the Fibonacci retracement levels on the chart, traders can identify potential entry and exit points based on the levels.

Fibonacci retracement is a powerful tool for technical analysis and can be used to identify potential support and resistance levels as well as potential entry and exit points. By plotting the Fibonacci retracement levels on a chart, traders can identify potential support and resistance levels and use them to make informed trading decisions.