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Fibonacci Retracement is created by taking two extreme points ( a major perk and a trough ) on a stock chart and dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%. These key Fibonacci ratios are identified as the support and resistance zones.
The Fibonacci ratios to keep in mind are 61.8 % , 38.2% & 23.6% . Though not under Fibonacci ratio , being a mid point 50% also to be considered to identify the support and resistance zone.
The theory is , when the market trend reaches the above ratio points it is tend to have a temporary retracement before it continues the previous trend. Fibonacci ratio will help us to identify what would be the next level the stock will retrace and target or stoploss can be fixed accordingly.
Fibonacci retracements use horizontal lines to indicate areas of support or resistance. They are calculated by first locating the high and low of the chart. Then five lines are drawn: the first at 100% (the high on the chart), the second at 61.8%, the third at 50%, the fourth at 38.2% and the last one at 0% (the low on the chart). After a significant price movement up or down, the new support and resistance levels are often at or near these lines.
The Same is illustrated in the image attached.
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