understanding financial jargon
As share prices move up and down over time they often retrace old ground until they find a support or resistance level, at which point the share price will often reverse direction. The Fibonacci Retracement pattern is a method that traders and investors use to help estimate where a stock prices resistance or support levels may be.
The Fibonacci retracement pattern is derived from the Fibonacci Series which is a sequence of numbers first created by Leonardo Fibonacci in 1202. Certain ratios can be derived from the number series which when expressed as a percentage of the last major price movement on a share price graph, can indicate where support or resistance levels are likely to occur.
This method of determining support and resistance levels is not always 100% accurate, but has been shown to occur far more often than random chance on share charts that it it has become an accepted tool in the 'chartists' kit. The example below shows a typical retracement pattern taken from a weekly price chart of Amec PLC.
Once the price move which started in August 2007 had completed in October 2008 it was possible to construct a Fibonacci retracement pattern which subsequently showed resistance and support points of Amecs share price up to present day. It also predicted the peak price at the beginning of 2011, three years in advance. Investors and traders can use this type of pattern to assess where they may place stop losses and also take profits.
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