From the June 01, 2012 issue of Futures Magazine • Subscribe!

It’s not witchcraft, it’s Fibonacci

There are two retracement levels that deserve the majority of your focus: The 38.2% and 61.8% Fibonacci retracement. 

As price trades near each of these levels, a reversal or inflection point often will materialize. In a Fibonacci retracement, the reversal point is where price halts its pullback and resumes trading in the direction of the original price move. At the inflection point, price weakness is revealed and the market could fail to gain a foothold to reestablish the original trend (see “Adjusting your perspective,” below).

These two concepts form the cornerstone of using Fibonacci retracements and are key to unlocking the door of successful price interpretation that can lead you to picking low-risk setups. This will serve as a reference when sizing up turns in price that occur within these retracement levels to measure how strong the preceding price move, or trend, was previous to the pullback.

While opportunities exist with each retracement level, these are general guidelines and broad target areas, not exact points. 

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