Fibonacci Retracement

The Fibonacci retracement tool is based on mathematical ratios derived from the famous Fibonacci sequence, most notably 23.6%, 38.2%, 50%, 61.8%, and 78.6%. The indicator is drawn by selecting two key points on a chart—typically the swing low and swing high of a clear price wave. Horizontal lines automatically appear at these percentage levels between the two points, representing potential retracement levels before the original trend resumes.

Traders use these levels to identify potential areas where price might rebound during a pullback within a broader trend. For example, in an uptrend, a trader might anticipate price bouncing upward upon touching the 61.8% level after a temporary pullback. The 61.8% level is considered one of the most critical and is often referred to as the "Golden Ratio."

Fibonacci tools are also used inversely to determine Fibonacci extensions, which help estimate potential price targets after breaking a previous high or low, using ratios such as 127.2% and 161.8%.

Common mistakes include drawing the levels inaccurately by selecting the wrong swing high or low that does not reflect the actual wave, or treating these levels as guaranteed support and resistance lines rather than probabilistic zones that require additional confirmation from candlesticks or other indicators before making a trading decision.