What is Fibonacci retracement?
Fibonachchi darajalari
In short
The 23.6%, 38.2%, 50% and 61.8% portions of an impulse move. Used to estimate where a pullback might stop.
Also known as: fib
Fibonacci retracement levels are a tool for estimating where a pullback after a strong move (impulse) might stop. The main levels are 23.6%, 38.2%, 50% and 61.8%. 50% is not a Fibonacci ratio, but it is traditionally included.
How to draw it
In an up-move the tool is dragged from the low to the high. Each level:
- Level price = High − (High − Low) × Percentage
In a down-move it's the reverse: drawn from the high to the low.
How it is used
- A shallow pullback (23.6–38.2%) signals a strong trend.
- 50–61.8% is the most watched zone; the 61.8–65% band is called the golden pocket.
- A pullback deeper than 61.8% can mean the trend is weakening.
- A level that lines up with other factors — support, an order block, a moving average — (confluence) is considered stronger.
For setting targets, Fibonacci extensions are used.
Limitations
Fibonacci levels have no "magic" — when they work, it's because many traders watch them. The result depends heavily on where you anchor the start and end of the impulse. With so many levels, price almost always stops near one of them, which invites hindsight bias.
An impulse from $100 to $120, then a pullback that stopped at 61.8% before the rise continued. Levels are zones of probability, not exact points.
Example
A fictional stock rallies from $100 to $150. Impulse: $150 − $100 = $50.
- 23.6%: $150 − $50 × 0.236 = $150 − $11.80 = $138.20
- 38.2%: $150 − $19.10 = $130.90
- 50%: $150 − $25 = $125.00
- 61.8%: $150 − $30.90 = $119.10
Suppose there is also former resistance (now support) around $125. A trader plans an entry in the $125–$126 area with a stop below the 61.8% level at $118.50. If price closes below $119.10, the pullback has deepened and the plan is void.
Mistakes and tips
Anchor the impulse on clear swing points — a vague starting point shifts every level.
Don't enter automatically when a level is hit — wait for a candle reaction or lower-timeframe confirmation.
Use Fibonacci together with another level or structure, not on its own.
Frequently asked questions
- Which Fibonacci level is the most important?
- Many traders consider 50% and 61.8% the most important. But in each case, the level that lines up with other factors is the stronger one.
- Why do Fibonacci levels work?
- There is no scientifically proven reason. The main explanation is that many participants watch these levels and place orders around them.
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