In this post I will discuss the proper usage of fibonacci retracement techniques and we will also see how to use it for market reversal. Using these we can beforehand calculate potential market reversal points and most of the times they are deadly accurate.
What are fibonacci levels? It is a measure of possible movement between low and high OR high and low and we measure retracement of the prior move. You can easily create fibonacci retracement techniques in Zerodha Kite. If you do not have an account in Zerodha CLICK HERE to get one.
First identify a low and high in the chart using your favourite charting software. See the image below:
In Zerodha Kite click on the DRAW button and this will activate the SELECT TOOL menu in your chart.
Activate FIBONACCI from the SELECT TOOL option. If you want the retracement levels from the last high, then first click on the low and drag mouse till the high. This will create fibonacci retracement levels from the high.
How To Use Fibonacci Retracement Technique For Market Reversal?
Lets see a practical example. On 2008 Nifty made a high near 6300 and from there a major fall happened. So this became a supply zone for Nifty. So when Nifty once again moved up to that zone on 2010 deepavali many traders sold close to that supply zone. While selling you can calculate the targets using the fibonacci retracement techniques. Locate the last low. See the image below:
In general 3 fibonalli retracement levels are important. First support will come at 38.2%, second at 50% and third at 61.8%. So if selling at a supply zone OR buying at a support zone these levels can be the targets.
Now check the image above, how Nifty exactly took support at 38.2% retracement zone after correcting from the supply area. I will be happy to answer your questions in the comment section below.