Fibonacci Retracements

Fibonacci retracements identify potential support and resistance levels based on mathematical ratios found throughout nature. Many traders use these levels to time entries and exits. [DEFINITION] Fibonacci Retracement: Horizontal lines indicating potential support/resistance at key percentage levels (23.6%, 38.2%, 50%, 61.8%, 78.6%) derived from the Fibonacci sequence. ### The Fibonacci Sequence and Ratios **Sequence:** 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89... **Key ratios derived from the sequence:** - 38.2%: Any number divided by the number two places to the right - 61.8%: Any number divided by the next number (the "golden ratio") - 23.6%: Any number divided by the number three places to the right [TIP] You don't need to calculate Fibonacci levels manually. Every charting platform draws them automatically. Just understand what they mean. ### Drawing Fibonacci Retracements **For an uptrend:** Draw from the swing low to the swing high **For a downtrend:** Draw from the swing high to the swing low The tool then displays horizontal lines at key retracement levels. [EXAMPLE] Stock rallies from $50 to $100. Fibonacci retracement levels: - 23.6%: $88.20 - 38.2%: $80.90 - 50%: $75.00 - 61.8%: $69.10 - 78.6%: $60.70 ### Trading with Fibonacci **Most important levels:** - 38.2%: Shallow pullback, strong trend - 50%: Common retracement level - 61.8%: Deep pullback, critical for trend continuation [KEY] The 61.8% level is the "golden ratio" and often the last line of defense for a trend. A break beyond 61.8% suggests the trend may have ended. ### Confluence with Other Analysis Fibonacci levels work best when they align with: - Previous support/resistance - Moving averages - Trend lines - Round numbers [EXAMPLE] Apple rallies from $140 to $180. The 50% retracement is $160, which also happens to be a previous resistance level and near the 50-day MA. This confluence makes $160 a high-probability support zone. ### Fibonacci Extensions For projecting price targets beyond the original move: **Common extension levels:** - 127.2%: First target - 161.8%: Second target - 261.8%: Extended target [WARNING] Fibonacci levels are not magic—they're tools for identifying potential levels. Many retracements stop at random levels between Fibonacci points. Always use other confirmation. [EXERCISE] A stock rallies from $20 to $40. It then pulls back. At what price is the 61.8% Fibonacci retracement? |ANSWER| Move = $40 - $20 = $20. 61.8% of $20 = $12.36. Retracement level = $40 - $12.36 = $27.64. This would be a key level to watch for potential support. [SCENARIO] You're looking to buy a stock in an uptrend. It's pulling back. Price reaches the 38.2% Fibonacci level, which also coincides with the rising 50-day moving average and previous resistance (now support). What do you do? This is a high-confluence zone—three factors aligning. Consider buying here with a stop below the next Fibonacci level (50% or 61.8%). The confluence increases the probability that this level will hold.