Fibonacci retracement
A charting tool that draws horizontal lines at set percentages of a previous price move, commonly 23.6%, 38.2%, 50%, 61.8% and 78.6%, to mark possible pullback levels.
After a clear move up or down, prices often pull back part of the way before either continuing or reversing. Fibonacci retracement levels are a way of marking where that pullback might pause. The ratios come from the Fibonacci number sequence: 61.8% is close to the "golden ratio", 38.2% and 23.6% are related ratios. The 50% level is not a Fibonacci ratio but is included by convention.
How to draw it
Pick a swing low and swing high (for an up-move), and the tool plots the levels between them. For a down-move, draw from the swing high to the swing low.
Worked example
Illustratively, EUR/USD rises from 1.0600 to 1.0800, a 200-pip move. The retracement levels are:
- 23.6%: 1.0800 minus 47 pips, about 1.0753
- 38.2%: about 1.0724
- 50%: 1.0700
- 61.8%: about 1.0676
- 78.6%: about 1.0643
A trader might watch for signs of buying near 1.0724 or 1.0676, with a stop-loss below the next level or below the 1.0600 start of the move.
Limits
- Subjectivity: different traders choose different swing points and get different levels.
- So many levels: with five lines, price will usually react near one of them, which makes the tool look better in hindsight than it is.
- No mechanism: the levels work, if at all, because many people watch them. They are more useful where they coincide with support or resistance, a round number or a moving average.
Not investment advice. This is general information and education, written without knowledge of your circumstances. It is not a recommendation to buy or sell any instrument. Past performance is not a reliable indicator of future results. Trading leveraged products carries a high risk of losing money. Risk warning