Trading term

What is Fibonacci retracement?

Fibonacci retracement draws horizontal levels at fixed percentages of a completed price swing: 23.6%, 38.2%, 50%, 61.8% and 78.6%. Traders use them to mark where a pullback might find support before the trend resumes.

You anchor the tool to a swing you can point at: the low and high of a move that has already happened. The software then divides that range at the Fibonacci ratios and draws a line at each. In an uptrend those lines sit below the high and act as candidate support; in a downtrend they sit above the low as candidate resistance.

The ratios come from the Fibonacci sequence — 61.8% is the limit of the ratio between consecutive terms, 38.2% is its square, and 23.6% its cube. The 50% level is not a Fibonacci ratio at all; it is included because markets frequently retrace half a move, an observation that predates the tool. The 61.8% and 50% levels get the most attention, and the zone between them is where many traders expect a healthy pullback to end.

Be honest about what this is. There is no accepted mechanism by which these ratios govern markets, and any level you draw will look meaningful because price passes through every price on its way down. The tool's practical value is that it makes everyone draw the same lines — which is a form of self-fulfilment, not a law.

Levels computed from the swing
23.6% · $62.9238.2% · $58.5450.0% · $55.0061.8% · $51.4678.6% · $46.42high $70low $40bounces hereLevels are computed from the swing — 61.8% of the $30 range below $70 is $51.46.

61.8% of the $30 range below the $70 high is $51.46. Price pulls back to $51.50, touches the level and closes back above it before the uptrend resumes.

For example

A stock rallies from $40 to $70, a $30 range. The 61.8% retracement sits at $51.46. Price pulls back, bottoms at $51.50 — right on that level — and closes back above it, then resumes the uptrend. The level gave a place to buy with a stop just beneath.

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Why it matters to you

In an uptrend the hard question is not whether to buy but where, and 'wait for a pullback' is not a plan until you name a price. Fibonacci levels turn that into specific, pre-marked prices you can set alerts on and place orders against, with an obvious invalidation point just beyond each one.

⚠ Anchor it once, honestly

Because you choose the swing, it's trivially easy to re-anchor until a level lands where price already reacted, then declare the tool worked. That's curve-fitting after the fact. Pick the most obvious swing high and low before you look at where the lines fall, and if the levels don't explain anything, accept that rather than re-drawing.

Frequently asked questions

What is Fibonacci retracement?

It's a tool that divides a completed price swing at set percentages — 23.6%, 38.2%, 50%, 61.8% and 78.6% — and draws a horizontal line at each. Traders use those lines as candidate support or resistance for a pullback.

Which Fibonacci retracement level is most important?

61.8% gets the most attention — it's the ratio the Fibonacci sequence converges on — with 50% close behind. Many traders treat the 50%–61.8% band as the zone where a healthy pullback in a trend should end.

Why is 50% included when it isn't a Fibonacci number?

It isn't derived from the sequence at all. It's included because markets often retrace about half of a move, an observation from Dow Theory that predates the tool. It's kept for practical reasons rather than mathematical ones.

Does Fibonacci retracement actually work?

There's no established mechanism by which these ratios govern markets, and the tool is easy to fit after the fact by re-choosing the swing. Its practical value is that many traders draw the same levels, so orders cluster there — a self-fulfilling effect rather than a law of markets.

Related terms

Anchored VWAPAnchored VWAP is a volume-weighted average price that starts from one candle you choose, rather than resetting at the start of each session. You anchor it to a meaningful event — an earnings gap, a major low, a breakout — and it tracks the average price everyone has paid since.Ascending triangleAn ascending triangle is a bullish continuation pattern: a flat horizontal resistance line on top, with a rising trendline of higher lows beneath it. As the higher lows squeeze price against the ceiling, pressure builds — and it usually resolves with a breakout up through the resistance.ATR (Average True Range)ATR (Average True Range) measures how much a security typically moves in a period — its volatility — as an average of recent trading ranges. It doesn't say which direction price is heading, only how far it tends to travel, which makes it a core tool for stop-losses and position size.Bearish engulfingA bearish engulfing is a two-candle reversal pattern in which an up candle is followed by a down candle whose body completely covers it. The second candle opens above the previous close and closes below the previous open.
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