Fibonacci Retracement
Based on the mathematical sequence discovered by Leonardo Fibonacci, these retracement levels identify potential support and resistance zones where price often reverses during pullbacks.
What is Fibonacci Retracement?
Fibonacci retracement is a technical analysis tool that uses horizontal lines to indicate areas of support or resistance at the key Fibonacci levels before price continues in the original direction. These levels are derived from the Fibonacci sequence, where each number is the sum of the two preceding ones.
The ratios—23.6%, 38.2%, 50%, 61.8%, and 78.6%—come from mathematical relationships within this sequence. Traders believe these ratios reflect natural patterns in market psychology and price behavior.
Uptrend Retracement
After a rally, price pulls back to Fibonacci support levels before potentially resuming higher.
Downtrend Retracement
After a decline, price bounces to Fibonacci resistance levels before potentially resuming lower.
Key Fibonacci Levels
Not all Fibonacci levels are created equal. Some levels see more reaction than others based on their mathematical significance and market psychology.
Shallow retracement. Often seen in strong trends with high momentum.
Common first test. Healthy pullback in a strong trend.
Not a Fibonacci ratio but widely watched. Psychological middle ground.
The "Golden Ratio." Most important level—where major reversals occur.
Deep retracement. Last defense before trend invalidation.
How to Draw Fibonacci
Correct placement is critical for Fibonacci to work. Always draw from a significant swing low to swing high (uptrend) or swing high to swing low (downtrend).
Drawing in an Uptrend
- Identify a clear swing low (start of the move)
- Draw to the swing high (end of the move)
- Levels automatically plot as potential support
- Look for confluence with other support zones
Drawing in a Downtrend
- Identify a clear swing high (start of the move)
- Draw to the swing low (end of the move)
- Levels automatically plot as potential resistance
- Watch for rejection candlesticks at these levels
Trading Strategies
Fibonacci works best when combined with other forms of analysis. Never trade a Fibonacci level blindly—wait for confirmation.
Confluence Trading
Combine Fib levels with moving averages, trendlines, or prior support/resistance for stronger signals.
Candlestick Confirmation
Wait for reversal patterns (hammer, engulfing) at Fib levels before entering.
Cluster Zones
Multiple Fibonacci levels from different swings creating a zone increases probability.
Fibonacci Extensions
While retracements identify entry zones, Fibonacci extensions project profit targets beyond the original move. Common extension levels include 127.2%, 161.8%, and 261.8%.
161.8% Extension
The Golden Ratio extension. First major profit target after a successful retracement entry.
261.8% Extension
Extended target for strong momentum moves. Let winners run to this level in clear trends.
Pro Tip
The 61.8% retracement often leads to a 161.8% extension. This is one of the highest probability setups in technical analysis—a 1:1.618 risk/reward ratio at minimum.
Frequently Asked Questions
What is Fibonacci retracement?
Fibonacci retracement is a tool that uses key ratios (23.6%, 38.2%, 50%, 61.8%, 78.6%) derived from the Fibonacci sequence to identify potential support and resistance levels during a pullback in a trend. Traders use these levels for entries and targets.
Which Fibonacci level is most important?
The 61.8% (golden ratio) and 38.2% levels are among the most watched. The 61.8% retracement often acts as strong support in uptrends and resistance in downtrends. The 50% level is also widely used as a psychological midpoint.
How do I draw Fibonacci retracement correctly?
In an uptrend, draw from the swing low to the swing high; retracement levels then show potential support. In a downtrend, draw from the swing high to the swing low; levels show potential resistance. Use clear, significant swing points—not minor wicks.
What are Fibonacci extensions?
Extensions project targets beyond the original move. Common levels are 127.2%, 161.8%, and 261.8%. After a retracement entry (e.g. at 61.8%), the 161.8% extension is a popular profit target. They help define where trends may extend.
Do Fibonacci levels always work?
No. They are probabilistic—price respects them often but not always. Combine with trend, volume, and other support/resistance (e.g. moving averages, prior highs/lows) for higher-probability setups. Use stop losses in case levels fail.