What is the fibonnaci retracement

Fibonacci retracement is a technical analysis tool used to identify potential support and resistance levels in a market. It is based on the Fibonacci sequence of numbers, which are ratios derived from the mathematical relationships between numbers in the Fibonacci series. These ratios are 23.6%, 38.2%, 50%, 61.8%, and 100%, which are commonly used to calculate Fibonacci retracement levels.

1. **Origin and Significance**: Fibonacci retracement levels are named after Leonardo Fibonacci, an Italian mathematician who introduced the Fibonacci sequence to the Western world. These numbers have been observed in various natural phenomena and are believed to have an influence on financial markets due to their prevalence in nature.
2. **Calculation**: To calculate Fibonacci retracement levels, you take two extreme points on a chart, typically a high point and a low point, and divide the vertical distance by the Fibonacci ratios. For example, if you take a high point at $10 and a low point at $2.36, the 23.6% Fibonacci retracement would be calculated as $2.36 (the retracement amount) divided by the difference between the high and low points ($10 - $2.36 = $7.64) multiplied by 23.6%.
3. **Usage**: Fibonacci retracement is used by traders to identify potential entry and exit points, stop-loss levels, and target prices. It is particularly useful for spotting support and resistance levels, as markets often retrace a portion of their move before continuing in the original direction.
4. **Limitations**: While Fibonacci retracement can be a valuable tool, it is not a guarantee of future performance, and its effectiveness can vary. Some traders argue that there is no reliably standard retracement, and that price volatility can explain the appearance of retracement levels.

In summary, Fibonacci retracement is a technical analysis technique that uses Fibonacci ratios to identify potential support and resistance levels in financial markets. It is based on the idea that these ratios, which are found in the Fibonacci sequence, have a natural occurrence in financial price movements, providing traders with potential insights into market behavior.