Fibonacci retracement
Also known as: Fib retracement
Fibonacci retracement is a technique that uses a set of horizontal lines, drawn at specific percentages between a 's recent high and low, to identify levels where a pullback might find support or resistance. The percentages, most commonly 23.6%, 38.2%, 50%, 61.8%, and 78.6%, are derived from ratios found in the Fibonacci sequence, a numerical sequence in which each number is the sum of the two before it.
To use it, a trader draws a line from a significant swing low to a significant swing high, or vice versa during a , and the charting software marks each Fibonacci level along that range. If a rallies and then begins to pull back, traders watch these levels, particularly the 38.2%, 50%, and 61.8% marks, as places where the pullback might stall and the prior trend might resume, since many other market participants are watching and potentially trading around the same levels.
The 50% level is not technically a Fibonacci ratio but is included in nearly every practical application because retracements to roughly the halfway point of a prior move are common. Critics of Fibonacci retracement point out that with several levels spaced closely together across a price range, a pullback is almost guaranteed to stop near one of them by chance alone, and that the tool works partly because enough traders use it that it becomes a self-fulfilling reference point, not necessarily because of any deeper mathematical property of markets. It remains one of the most widely used tools for identifying likely during a pullback.