A Typical Fibonacci Retracement Play:
Fibonacci Retracement offers potential support and resistance levels for technical traders. This tool is popular amongst short-term traders as they attempt to pinpoint trend reversals. The Fibonacci sequence of numbers was identified in the thirteenth century by mathematician, Leonardo Fibonacci. A typical trade based on this concept tends to play out as follows:
Step 1: Shares spike significantly within a short period of time on strong volume (typically a gain of 50-100%+).
Step 2: Shares sell off over the next day or two as traders take profits from the spike. Short sellers also begin piling in with the thesis that the stock is overvalued.
Step 3: Shares find a base of support at one of the Fibonacci levels (23.6%, 38.2%, 50%, and 61.8%). A new wave of traders seek to enter and shorts cover their positions, resulting in a short-term squeeze back to the upside.
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