Fibonacci retracement levels are horizontal lines used in technical analysis to indicate potential areas of support or resistance. These levels are based on the Fibonacci sequence, a mathematical series where each number is the sum of the two preceding ones. Traders apply these ratios to charts to identify where a price trend might pause or reverse.
The most common ratios used in trading are 23.6%, 38.2%, 50%, 61.8%, and 78.6%. While 50% is not an official Fibonacci number, it is widely utilized because markets often retrace half of a previous move before continuing in the original direction. To draw these levels, a trader selects the high and low points of a significant price swing. The tool then automatically calculates the percentage distances between these two points.
These levels act as psychological markers for market participants. When a price approaches a retracement level, traders often watch for signs of a bounce or a breakout. However, these tools do not guarantee future price movements. Financial markets are inherently unpredictable, and trading involves significant risk. Relying solely on retracement levels can lead to losses, so professional traders often combine them with other indicators like volume analysis or moving averages to confirm potential trade setups.
How this answer was produced
AI-assisted draft, human-reviewed by AlphaScala editorial against our standards before publication. General education, not advice for your specific situation.