Fibonacci retracement is a charting tool that projects likely support and resistance levels where price may react during a corrective move. Based on ratios derived from the Fibonacci sequence (1, 1, 2, 3, 5, 8, 13, 21, 34…).
Key levels (as % retracement of a move):
- 23.6%: shallow retracement (likely trend continuation)
- 38.2%: moderate retracement, important level
- 50%: median retracement (not a true Fibonacci mathematically, but widely used)
- 61.8%: "golden ratio" — most-watched level, often decisive
- 78.6%: deep retracement, last chance before invalidation
How to use it:
- Identify a clear move (low → high for an uptrend)
- Draw the Fibonacci from that low to that high
- Levels 38.2%, 50%, 61.8% become potential supports for buying on retracement
- Stop-loss below 78.6% (beyond which the trend is invalidated)
Why it works: not by mathematical magic, but by self-fulfilling prophecy. Millions of traders and algos use these levels → market naturally reacts to these zones because many orders are placed there.
Fibonacci extensions (127.2%, 161.8%, 261.8%): used to project price targets after a breakout. If EUR/USD breaks resistance, the 161.8% becomes a natural target.
Powerful combinations: Fibonacci + horizontal support/resistance + RSI = "confluence" → very high probability entry.