Fibonacci Retracement
Type: Support & Resistance / Price Levels
Fibonacci retracement uses key ratios derived from the Fibonacci sequence to identify potential support and resistance levels within a trend. It's a tool for finding where price is likely to pause or reverse after a directional move.
How it Works
The key Fibonacci ratios used in trading are 23.6%, 38.2%, 50%, 61.8%, and 78.6%. These levels are drawn by identifying a significant swing high and swing low, then plotting horizontal lines at each ratio between those two points.
The 61.8% level (the 'golden ratio') is considered the most significant. The 38.2% and 50% levels are also widely watched. These levels have no proven mathematical proof of predictive power — their value comes from the fact that enough traders use them to make them self-fulfilling to some degree.
How to Read It
In an uptrend, you draw Fibonacci from the swing low to the swing high. The retracement levels then show potential support zones where buyers may step in during a pullback.
In a downtrend, you draw from swing high to swing low. The retracement levels show potential resistance zones where sellers may defend during a bounce.
Key Signals
• 38.2% retracement: Shallow pullback — trend is strong. Price often continues quickly if this level holds.
• 61.8% retracement: Deeper pullback — still within a healthy trend correction. The 'golden ratio' level.
• Level confluence: A Fibonacci level aligning with a horizontal support/resistance or moving average can be considered a stronger area.
• Failure of 78.6%: If price breaks below 78.6% in an uptrend, the original swing is likely invalid — the trend may have reversed.
Limitations
• Fibonacci levels are subjective — different traders pick different swing points, producing different levels.
• They don't always hold. Markets don't read textbooks. Treat them as zones of interest, not precise lines.
• In isolation, Fibonacci is weak. Its real value comes when levels line up with other indicators or price structure.
Trader's Tip: Never use Fibonacci in isolation. Its value multiplies when a Fib level coincides with a key moving average, prior support/resistance, or a volume node. One level alone is a guess; three things agreeing is a trade setup.