Fibonacci Retracement is a popular technical analysis tool to identify potential reversal levels, support and resistance levels. Traders (specially day traders) frequently use this to track their trades. These are tracked in the form of ratios which are based on Fibonacci sequence which was developed by an Italian mathematician named Leonardo Fibonacci. The Fibonacci sequence is a sequence of numbers formed in such as way that the next number is the sum of the previous two numbers. In this article we will learn about Fibonacci Retracement and build a Fibonacci Retracement Calculator using MarketXLS.
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, and so on.
On of the most interesting outcomes of the Fibonacci sequence is the Golden ratio which is the ratio of the two consecutive numbers in the sequence. As we move further in the sequence, the ratio approximates to 1.618 – the golden ratio – the reverse of which is 0.618 of 61.8%.
Fibonacci Retracement Calculator Ratios
In stock markets, the idea behind retracement is that the markets will retrace (reverse direction) a predictable portion of a move. After which they will continue to move in the original direction.
Traders use Finonacci retracement ratios as guide for the levels where they would expect the retracement to occur.
The most common Fibonacci ratios used are 23.6%, 38.2%, 50%, 61.8%, 78.6% and 100%.
We calculate the 61.8% ratio by dividing a number by its next consecutive number (34/55 = 0.618). Similarly, we calculate the 38.2% by dividing a number by the number two places higher (13/34 = 0.382). Finally, we calculate the ratio 23.6% by dividing a number by the number three places higher (13/554 = 0.236).
Traders use the Fibonacci retracement levels as support and resistance levels
Apart from Fibonacci retracement levels, we also have Fibonacci extension levels as shown below:
0%, 38.2%, 61.8%, 100%, 138.2%, 161.8%
Traders use the Fibonacci extension levels as profit taking levels
Fibonacci Retracement Calculator in Excel
We have created a Fibonacci Retracement Calculator excel template. The template automates the calculation of Fibonacci Retracement and Extension ratios in both uptrend and downtrend scenarios. The excel template fetches the day’s high and low for a stock from MarketXLS and then calculates these levels.