What Is Fibonacci Retracement?
Also known as: Fib Retracement, Fibonacci Levels, Fib Levels, Fibonacci Retracement Levels
In short
Fibonacci retracement is a technical analysis tool that tries to identify potential support and resistance zones by drawing horizontal levels, based on ratios derived from the Fibonacci sequence, between the high and low of a price move.
The analyst selects the start and end points of a clear uptrend or downtrend; the tool adds levels to the chart that correspond to 23.6%, 38.2%, 50%, 61.8%, and 78.6% of that range. For example, for an asset that rose from $50,000 to $60,000, the 38.2% retracement level corresponds to $56,180 and the 61.8% level to $53,820. Traders watch whether the price reacts in these zones as it pulls back.
The ratios come from the ratios of numbers in the Fibonacci sequence, in which each number is the sum of the previous two; 0.618 is known as the “golden ratio.” The 50% level is not actually a Fibonacci ratio, but it is included in the tool because it is widely used. Fibonacci extensions, on the other hand, are used to identify potential target zones if the move continues.
The tool's limits are important: there is no strong scientific evidence that the levels have predictive power over price; part of the effect may come from many investors watching the same levels. Because results change depending on the selected highs and lows, the tool is generally evaluated together with indicators such as moving averages, trading volume, or RSI.
Last updated: · This content is for information purposes only and is not investment advice.