Let’s define and separate the meaning of technical analysis and fundamental analysis of investment instruments.
Technical analysis looks at the price movement of a security and uses this data to attempt to predict future price movements. Fundamental analysis is a method of measuring a security’s intrinsic value by examining related economic and financial factors ( financial statements, new employment, etc.).
Several days ago, while observing how the market, in general, took a 900-point dive and cryptos, like Bitcoin, joined the downward fest, I came across a comment from a technical analyst that stated the following: ” 0.382 Fib retracement resistance level and horizontal resistance area.” Having no idea what the individual was talking about I wrote the comment down for later study and here we are. Yes, I have a very inquisitive mind.
At first search, Google rendered nothing which surprised and intrigued me. Using my lifelong method of breaking things down into units to learn what the whole means I googled “Fib retracement levels” and came up with the following:
Fib retracement levels are horizontal lines that indicate where support and resistance are likely to occur. ( in financial language both support and resistance refer to price movements of a security. Upwards stop. Downwards stop. Support goes up until the pricing encounters resistance and declines.)
For unknown reasons, the Fibonacci ratios are seen to play a role in the stock market, just as they do in nature. ( more about this later). Technical traders attempt to use these ratios to determine critical points where an asset’s price momentum is likely to reverse or just change. If you are interested in learning and trading cryptos this subject becomes relevant because it’s very unlikely that analysts will not use fundamental analysis since they are unattached to any asset, except the only crypto collateralized by one dollar and they have “transparency issues.” Therefore, technical analysis is Queen.
A closer look at what this Fib retracement means. Fib stands for Fibonacci. Fib retracement lines indicate where support and resistance are likely to occur. The Fibonacci retracement levels are: 23.6% / 32.2% / 61.8% / and 78.6%. While not officially a Fibonacci ratio, 50% is also used.
Fibonacci retracements are popular tools that traders use to draw support lines, identify resistance levels, place stop-loss orders, and set target prices. ( this is what the big boys use.)
A Fibonacci retracement is created by taking two extreme points ( of pricing) on a stock chart and dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8%, and 100%.
Fibonacci retracements suffer from the same drawbacks as other universal trading tools, so they are best used in conjunction with the other indicators. ( Investopedia)
This information is above basic training but will not make a technical analyst out of you. But, having said that, if you wish to comprehend what these analysts are talking about it’s in your best interest to learn about these ratios and how they are used. It could make you a lot of money or stop you from losing a lot of money. How much is a lot of money is relative. In my mind, every penny count. Happy trading.
Learn more about finance terms at Investopedia