Fibonacci Retracements

Fibonacci retracement levels are horizontal lines drawn between a swing low and a swing high (or the reverse) at set percentages of the move: most commonly 23.6%, 38.2%, 50%, 61.8% and 78.6%. Traders use them to estimate how far a pullback might go before the trend resumes. The ratios come from the Fibonacci sequence, but their usefulness in trading comes mainly from the fact that so many traders watch the same levels.

Where the ratios come from#

The Fibonacci sequence starts 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89 and so on, each number the sum of the two before it. Dividing a number by the next one approaches 0.618; dividing by the number two places ahead approaches 0.382. These ratios appear in many natural patterns, which has given them a near mystical reputation. The 50% level is not a Fibonacci ratio but is included because traders watch half retracements. The 78.6% level is the square root of 0.618.

There is no scientific proof that markets obey these ratios. Treat them as common reference points, not laws.

How to draw a retracement#

1. Identify a clear impulse move with an obvious swing low and swing high. See Swing Highs and Lows.
2. In an uptrend, draw from the swing low to the swing high. The tool places levels below the high.
3. In a downtrend, draw from the swing high to the swing low. The levels appear above the low.
4. Use the same points each time, usually wick extremes, for consistency.

What the levels suggest#

The zone between 50% and 61.8% is often called the "golden pocket" and is watched closely by many traders, especially in crypto.

Trading retracements#

1. Trade with the trend: retracements are entries for continuation, not reasons to fight the trend.
2. Look for confluence: a Fibonacci level that lines up with prior support, a moving average or a round number is much stronger. See Level Strength and Clustering.
3. Wait for a reaction: a rejection candle or lower timeframe structure shift at the level.
4. Stop: beyond the next Fibonacci level or beyond the swing origin.
5. Target: the prior swing high, then extensions beyond it. See Fibonacci Extensions and Projections.

Common mistakes#

• Drawing from random points. Use clear, significant swings.
• Expecting exact turns at the level. Levels are zones.
• Ignoring trend and structure. A 61.8% level in a collapsing market is just another line.
• Hindsight fitting: almost any pullback stops near some Fibonacci level, which can make the tool look more predictive than it is.

Frequently asked questions#

What are the main Fibonacci retracement levels?#

23.6%, 38.2%, 50%, 61.8% and 78.6% of a prior move. The 38.2%, 50% and 61.8% levels are watched most.

How do you draw Fibonacci retracements in an uptrend?#

From the swing low to the swing high. The retracement levels then appear between them as potential pullback areas.

Do Fibonacci levels really work?#

They have no proven natural law behind them in markets, but because many traders watch them, price often reacts nearby. They work best combined with other levels and price action.

Next, learn how to project targets beyond the prior high with Fibonacci Extensions and Projections.

Sources#

• Wikipedia, Fibonacci retracement