A:

Traders who use Fibonacci retracement strategies believe that there are certain naturally occurring continuation patterns that appear in the stock market following a large price movement. The depths of these patterns are thought to conform loosely with the same ratios that are produced by the Fibonacci sequence. Through a study of these ratios, traders hope to identify temporary support and resistance levels, place transactions and spot reversals.

Sometimes, a series of Fibonacci retracements can be combined into a Fibonacci cluster. These clusters are normally tracked within a narrow column on the side of a price chart, with greater degrees of retracement frequency identified by areas of darker shading.

A cluster is an area where the abstract universality of Fibonacci trading tools directly overlaps with more traditional technical analyses. Fibonacci retracements are little more than small continuation patterns. Patterns that appear to bounce and change course along similar price points can highlight support and resistance levels on a price chart.

Traders can use the volume of retracements around a certain price point to help confirm a possible support or resistance line. Since many trading strategies center around the treatment of bounded ranges and breakouts, Fibonacci clusters can play an important role in countertrend trading, placing stop losses, setting target prices, and timing breakout exit and entry positions.

Fibonacci clusters are only a grouping of retracements; in and of themselves, they are not a logic-driven financial indicator. They are best complemented with other technical and fundamental tools that reflect data and history about the actual security at hand.

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