Understanding Fibonacci Retracement

Fibonacci retracement is a technical tool that marks potential support and resistance levels where a price might pause or reverse after a strong move.

The idea

After a sharp up- or down-move, prices often "retrace" (pull back) part of the way before continuing. Fibonacci retracement uses ratios derived from the Fibonacci sequence — 23.6%, 38.2%, 50%, 61.8% and 78.6% — to estimate how deep that pullback might go.

How traders use it

You draw the tool from the start to the end of a notable move (a swing low to swing high, or vice versa), and it plots horizontal lines at those ratios. Traders then watch those levels:

• In an uptrend, a pullback to the 38.2% or 61.8% level may offer a potential entry if support holds and the trend resumes.
• The 61.8% ("golden ratio") level is the most closely watched.
• A move that retraces beyond ~78.6% often signals the original trend may be failing.

Why it can "work"

Partly self-fulfilling — so many traders watch these levels that orders cluster around them, making them act as real support/resistance.

Caveats

• It’s subjective — the levels depend on which swing points you pick.
• Levels are zones, not exact lines, and price can overshoot.
• Use it with confirmation (candlesticks, volume, other support/resistance), never alone.

Fibonacci retracement is a useful way to anticipate pullback levels in a trend — a planning tool, not a guarantee. See how to read stock charts. Education only, not advice.