Fibonacci Retracements
Horizontal lines indicating potential support and resistance levels based on the Fibonacci sequence.
Plain English Explanation
Fibonacci retracements are like a ruler for pullbacks. After a big move, price often retraces to predictable levels before continuing.
**The magic ratios:**
- **23.6%:** Shallow retracement (strong trend)
- **38.2%:** Normal retracement in strong trends
- **50%:** Not actually Fibonacci, but widely watched
- **61.8%:** The "golden ratio" - most watched level
- **78.6%:** Deep retracement (weak trend or reversal coming)
**How traders use them:**
1. Find a significant swing high and swing low
2. Draw Fib from start to end of the move
3. Watch these levels for price reactions
**Why they work (controversial):** Some say it's math, others say it's self-fulfilling prophecy because so many traders watch these levels. Either way, they often produce reactions.
**The 61.8% level is king:** If price holds here, the original trend often continues. If it breaks, deeper retracement or reversal likely.
How It Works (Technical)
Fibonacci ratios (23.6%, 38.2%, 50%, 61.8%, 78.6%) are derived from the Fibonacci sequence. To use them, you draw from a significant low to high (uptrend) or high to low (downtrend). The levels then show potential support/resistance for retracements.
When It Works Best
- After clear, impulsive moves
- Markets with clean price action
- Confluence with other support/resistance
- Trending markets looking for entry on pullback
- All timeframes (works fractally)
When It Fails
- Choppy, directionless markets
- When swing points are unclear
- Without additional confirmation
- In highly manipulated markets
- When too many levels are used
Common Beginner Mistakes
- 1Drawing from wrong swing points (use significant ones)
- 2Expecting exact bounces (levels are zones, not lines)
- 3Using every Fib level (focus on 38.2%, 50%, 61.8%)
- 4Ignoring the trend direction
- 5Not combining with other analysis
Pro Tips
- Look for confluence with horizontal S/R or MAs
- Use Fib extensions for profit targets (127.2%, 161.8%)
- The best trades have multiple Fibs aligning
- Wait for price action confirmation at Fib levels
- Higher timeframe Fibs are more reliable
Related Indicators
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