Field Guide to Trading Terms

Fibonacci retracement

Family VI · Charts & indicators

Not to be confused with fibonacci, retracement, fibonacci pivot.

Fibonacci retracement is a technical analysis method that uses horizontal lines at key Fibonacci ratios to indicate possible reversal points during a price pullback. The tool is drawn by connecting a significant low to a significant high (or vice versa), and the levels are calculated as proportions of that price range. Traders watch these levels for signs of support or resistance, but the tool does not predict whether a level will hold.

Calculation and Interpretation

The retracement levels are derived from the Fibonacci sequence, where each number is the sum of the two preceding ones. The key ratios are 23.6%, 38.2%, 50%, 61.8%, and 78.6%, though 50% is not a true Fibonacci ratio but is included for its common use. These percentages represent how much of a prior move has been retraced by a counter-trend move.

To apply the tool, a trader selects a swing low and a swing high. The vertical distance between them is multiplied by each ratio to produce price levels. For example, if a stock rises from $50 to $100, the 38.2% retracement level is $100 - ($50 × 0.382) = $80.90. The 61.8% level is $100 - ($50 × 0.618) = $69.10. These levels are then plotted on the chart as horizontal lines.

Worked Example

Assume a stock moves from a low of $80 to a high of $120. The retracement levels are calculated as follows:

Fibonacci Retracement Levels for a $80–$120 Swing
23.6%$120 − ($40 × 0.236)$110.56
38.2%$120 − ($40 × 0.382)$104.72
50.0%$120 − ($40 × 0.500)$100.00
61.8%$120 − ($40 × 0.618)$95.28
78.6%$120 − ($40 × 0.786)$88.56

The 78.6% level is often considered the last line of defence before the entire move is retraced.

Practical Use and Limitations

Traders use Fibonacci retracements in conjunction with other technical tools such as trendlines, moving averages, or candlestick patterns to identify potential entry or exit points. A common strategy is to look for a bounce at a retracement level in the direction of the prevailing trend.

However, the levels are not guaranteed to act as support or resistance. Their effectiveness varies by market, timeframe, and the degree to which other market participants monitor them. They should not be used in isolation, and no single level should be treated as a certainty.

Often confused with

fibonacci
The Fibonacci retracement is a specific charting tool that applies Fibonacci ratios to price swings, whereas the Fibonacci sequence itself is a mathematical series of numbers; the visible sign is that the retracement appears as horizontal lines on a price chart, while the sequence is a list of integers.
retracement
A Fibonacci retracement is a tool that plots levels based on Fibonacci ratios, while a retracement is any temporary counter-trend move in price; the visible sign is that the Fibonacci retracement adds labelled percentage lines to the chart, whereas a retracement is simply the price action itself.
fibonacci pivot
A fibonacci pivot is a set of horizontal support and resistance levels calculated from the previous period's high, low and close, with the retracement ratios 23.6%, 38.2%, 50%, 61.8% and 100% applied to that range around a central pivot point.

See also

Family: VI · Charts & indicators · Index A–Z