Glossary
Fibonacci retracement
Horizontal levels at 23.6%, 38.2%, 50%, 61.8% and 78.6% of a prior move, which traders watch as possible support or resistance.
A Fibonacci retracement is a set of horizontal lines drawn across a completed price swing at fixed fractions of its length, usually 23.6%, 38.2%, 50%, 61.8% and 78.6%. Traders use the lines to anticipate where a pullback inside a trend might pause and find support (or, in a downtrend, resistance). The tool is popular partly because so many chart platforms draw it, which makes the levels widely watched.
How it works
Pick a swing low and a swing high (or the reverse in a downtrend). Each level sits a set percentage of the range back from the end of the move.
Where the ratios come from
In the Fibonacci sequence (1, 1, 2, 3, 5, 8, 13, 21 …) each number divided by the next approaches 0.618, and a number divided by the one two places later approaches 0.382. 23.6% is 0.382 × 0.618, and 78.6% is the square root of 0.618. The 50% line is not a Fibonacci ratio at all; it is included out of convention.
Limits
There is no mechanism that makes markets respect these ratios. Results depend heavily on which swing points the analyst picks, and with five levels spread across a range, price will almost always be near one of them, which makes after-the-fact success easy to see. Most traders treat a level as meaningful only when it lines up with other evidence, such as a prior high, a moving average or volume.