Stock Market · Technical Analysis

Fibonacci retracements

What are Fibonacci retracements?

Fibonacci retracements use horizontal lines to indicate areas of support or resistance at the key Fibonacci ratio levels before price continues in the original direction.

The key levels: 23.6%, 38.2%, 50%, 61.8%, and 78.6%. The most watched are 38.2%, 50%, and 61.8%.

Where do Fibonacci numbers come from?

The Fibonacci sequence (0, 1, 1, 2, 3, 5, 8, 13, 21...) has a fascinating property: each number divided by the next approaches 0.618. This ratio appears throughout nature, in shells, leaves, galaxies. Traders believe markets reflect human psychology, which follows similar patterns.

> 61.8% is called the 'golden ratio'. The most important Fibonacci level in trading.

How to draw Fibonacci retracements

1. Identify a significant swing high and swing low

2. Draw the Fib tool from the swing low to the swing high (in an uptrend)

3. The tool automatically plots the retracement levels

4. Watch for price to find support at these levels during pullbacks

The levels in practice

• 38.2% retracement: shallow pullback, strong trend. Aggressive traders buy here.
• 50% retracement: the midpoint. Most common area for pullback support.
• 61.8% retracement: deeper pullback, but still within a healthy trend. If this breaks, the trend may be over.

61.8%the golden ratio retracement level. Strongest support in an uptrend pullback

Fibonacci extensions

Used to project how far price might travel beyond the original swing high. Common extension targets: 127.2%, 161.8%, 261.8%. These become profit targets.

Important caveat

Fibonacci works to the extent that enough traders believe in it. A self-fulfilling prophecy at certain levels. That also caps what it can tell you on its own: a level only holds while the crowd watching it agrees, which is why it reads more reliably alongside independent signals like candlestick patterns, volume, or RSI than by itself.

Takeaway. Draw Fibonacci from swing low to high. 38.2%, 50%, 61.8% are the key retracement support levels to watch during pullbacks.