Horizontal lines drawn at key Fibonacci ratios (23.6%, 38.2%, 50%, 61.8%) to identify potential reversal levels.
Fibonacci retracement is a tool that draws levels between a swing high and swing low using ratios derived from the Fibonacci sequence. The most important levels are 38.2%, 50%, and 61.8%. Traders expect price to potentially stall or reverse at these levels during a pullback. The 61.8% level (the “golden ratio”) is considered the most significant.
Fibonacci levels are self-fulfilling because so many traders watch them. They provide objective areas to look for entries during pullbacks, set profit targets, and place stop losses. When Fibonacci levels align with other confluence factors (support, order blocks, MAs), the probability of a reaction increases significantly.
A stock rallies from $100 to $150. You draw Fibonacci retracement. The 61.8% level is at $119.10. When price pulls back to $119, it bounces sharply — confirming the Fibonacci level as support and offering a long entry back toward $150.
Price retraces to the 61.8% Fibonacci level (the golden ratio) and bounces, confirming it as support for a long entry.