Fibonacci retracement helps answer a common question in a trend: how far might this pullback go? The levels come from ratios associated with the Fibonacci sequence, chiefly 0.618 and its relatives. There is no proven reason markets respect them, but because so many traders watch them, they often coincide with real support and resistance zones.
How it’s calculated
In an uptrend, draw from the swing low to the swing high. For each ratio:
Level = swing high − (swing high − swing low) × ratio
In a downtrend, draw from the swing high to the swing low:
Level = swing low + (swing high − swing low) × ratio
Standard ratios: 23.6%, 38.2%, 50%, 61.8%, 78.6%. Extensions beyond 100% (127.2%, 161.8%) are used for targets.
Example
A stock rallies from a swing low of $100 to a swing high of $150, a $50 move.
- 23.6%: 150 − 50 × 0.236 = $138.20
- 38.2%: 150 − 50 × 0.382 = $130.90
- 50%: 150 − 50 × 0.500 = $125.00
- 61.8%: 150 − 50 × 0.618 = $119.10
- 78.6%: 150 − 50 × 0.786 = $110.70
Suppose the pullback stalls near $131, where an old resistance also sits and a hammer forms. That confluence is more interesting than the 38.2% level alone. A stop below the 61.8% level at about $118 and a target back at the $150 high would give a risk of about $13 for a reward of about $19. The Fibonacci calculator computes all levels instantly.
Common mistakes
- Picking swings after the fact. Different swing points produce different levels; use clear, obvious highs and lows.
- Expecting exact touches. Treat levels as zones; price often overshoots by a little.
- Trading a level without a signal. Wait for a reaction such as a bullish engulfing candle or a break of a minor down-trendline.
- Drawing on noise. On a choppy lower timeframe, fib levels are everywhere and mean little.
- Ignoring the trend. A deep retracement beyond 78.6% often means the original move has failed.
Educational content — not financial advice.
Updated