Fibonacci Retracement: Fibonacci price retracements are run from a prior low to high swing using the ratios 0.382, 0.50, 0.618 and 0.786 to identify possible support levels as the market pulls back from a high. First practice on your forex demo account. Learn about forex managed accounts.
Similarly you need to identify possible resistance levels when the price action bounces back from a low. Retracements are run from a prior high to low swing using these same ratios looking for resistance as the market bounces from a low. Most basic technical analysis software will run the Fibonacci retracement levels for you when you choose the swing you want to run them from.
If you want to understand how to calculate the Fibonacci price retracements yourself, multiply the length of the swing (from low to high or high to low) by the retracement ratios and then subtract the result from the high if you are running low to high swings or add the results to the low if you are running high to low swings.
Fibonacci Price Extensions: It is important to know possible price extensions to make stop loss and take profit decisions. Fibonacci price extensions are almost similar to the Fibonacci Price retracements in that they are run from the prior lows to highs or from prior highs to lows using only two data points to run the price relationship.
What is the difference between the Fibonacci Price Extensions and Fibonacci Price retracements? The difference between the Fibonacci price extensions and the Fibonacci price retracements is that we are running the relationship of a prior swing that are less than 100% or retracing the price move whereas with the extensions we are running the relationships of a prior swing that are extending beyond 100% of it.
Fibonacci Price extensions are run from prior low to high swings using the ratios 1.272 and 1.618 for potential support. They are run from prior high to low swings using the ratios 1.272 and 1.618 for potential resistance. These two techniques are named differently to indicate whether the price relationship is occurring within the prior swing or extending beyond it.
Fibonacci Price Projections: We use 1.00 and 1.618 ratios to run the projections. Fibonacci price projections are run from three data points and are comparing swings in the same direction. They are run from a prior low to high swing and then projected from another low for possible resistance or they are run from prior high to low swing and projected from another high for possible support.
A price cluster is the coincidence of at least three Fibonacci relationships that come together within a relatively tight range. These price clusters identify key support and resistance zones that can be considered to be trade setups.
A price cluster can also develop with a coincidence of more than three price relationships. Three is just the minimum number required to meet the definition. You may see five to ten price relationships come together in a relatively tight range. There are times when you see these large clusters develop not too far from the current market activity and they tend to act like a magnet for price.