A tool that uses horizontal lines to indicate areas of support or resistance at key Fibonacci levels (23.6%, 38.2%, 50%, 61.8%, 78.6%).
Deep Dive
Fibonacci retracement is a technical analysis tool based on the Fibonacci sequence, a mathematical pattern found throughout nature. In trading, key Fibonacci ratios (23.6%, 38.2%, 50%, 61.8%, 78.6%) are used to identify potential support and resistance levels where price may reverse during pullbacks.
To apply Fibonacci retracement, draw from a significant swing low to swing high (for uptrends) or swing high to swing low (for downtrends). The levels appear automatically, showing where price might find support or resistance during its retracement of the prior move.
The most important levels are 50% and 61.8% (the golden ratio). Many traders look for confluence at these levels - when Fibonacci aligns with other technical factors like previous support/resistance, moving averages, or order blocks, the probability of a reaction increases significantly.
Why It Matters
Fibonacci levels provide high-probability entry and exit points based on natural market retracement patterns.
Related Terms
- Pullback — A temporary reversal in price direction within an ongoing trend, often returning to a support or resistance level before resuming.
- Support — A price level where buying pressure is strong enough to prevent the price from declining further. It acts as a floor for the price.
- Resistance — A price level where selling pressure is strong enough to prevent the price from rising further. It acts as a ceiling for the price.
- Swing High — A local price peak formed when price makes a higher high followed by a lower high on both sides.
- Swing Low — A local price trough formed when price makes a lower low followed by a higher low on both sides.