In an up-trending market, price will form higher highs and higher lows. Another way of stating this is that price will move in impulses to the upside and retracements to the downside.
Traders will try and anticipate where these downward retracements or pullbacks will stop and then resume the upward trend. Buying these pullbacks in an uptrend is relatively straight forward where traders will use a rising trend line, moving averages, or prior support levels for buying entries.
Another way of anticipating the pullback of an uptrend is by using the Fibonacci retracement tool. Traders will use the 0.618, also known as the Golden Ratio, and different derivatives of 0.618 such as 0.382, to find potential reversals in these retracements.
The most popular ratios used are the 38.2%, 50%, and 61.8%. The 50% ratio is not an official Fibonacci ratio however it is widely watched and should be considered when using Fibonacci analysis.
In the video below, we’ll take a look at the basic uses of the Fibonacci retracement tool and what to look for when anticipating a reversal.
Click Here for Part 1: How To Use Fibonacci Numbers in Trading and Investing
Click Here for Part 3: What Are Fibonacci Confluence Zones?