What Fibonacci Retracements Are
Fibonacci retracement takes a recent swing (low to high or high to low) and divides it into ratios: 23.6%, 38.2%, 50%, 61.8%, and 78.6%. Each becomes a potential pullback level traders watch for the trend to resume.
Why the Levels Matter
Partly self-fulfilling. Enough traders and algorithms watch 38.2%, 50%, and 61.8% that buying clusters there in uptrends and selling clusters there in downtrends. Whether the ratios have a deep mathematical basis in markets is debatable; whether they are widely watched is not.
The Three Levels That Carry Most of the Signal
38.2% — shallow pullback. In a strong trend, price reverses here without giving back much. Aggressive trend-followers buy this level.
50% — not strictly Fibonacci but always included. Half-back of the move.
61.8% — deep pullback. If price reaches and reverses here, trend resumes. If it breaks (in an uptrend), the previous trend is likely over — treat the move as reversal, not continuation.
Drawing Retracements
Use a clearly defined swing — a peak and trough obvious to anyone looking. Arbitrary intra-day wiggles produce meaningless levels. On a daily chart, often a 1-3 month swing.
Combining With Other Tools
A Fibonacci level alone is weak. Strong setups: confluence with a prior S/R, a moving average (50 or 200), a trendline, or a reversal candle at the level. Never trade Fibonacci naked.
Extensions
Extensions (127.2%, 161.8%, 261.8%) project upside targets after retracement completes. The 161.8% extension is the most-watched continuation target.