What is fibonacci retracement in trading?

Horizontal levels drawn at set percentages of a prior move, used to anticipate pullback depth. The tool is anchored to a swing low and swing high, then draws lines at 23.6%, 38.2%, 50%, 61.8% and 78.6% of that range.

Indicators

Fibonacci Retracement

Horizontal levels drawn at set percentages of a prior move, used to anticipate pullback depth.

Also called: fib · fibs · retracement levels

Written by Javier Sánchez Ros

In plain language

The tool is anchored to a swing low and swing high, then draws lines at 23.6%, 38.2%, 50%, 61.8% and 78.6% of that range.

The levels have no mechanical force. They matter to the extent that many participants watch the same ones and place orders there.

Anchoring is subjective, and different anchor choices produce entirely different levels — which is why fib levels are strongest when they coincide with structure that already existed.

Worked through

A move from $80 to $104, and where the pullback levels fall

Move: $24.00
38.2% retracement: $94.83
50% retracement: $92.00
61.8% retracement: $89.17

The value here is not mystical, it is logistical. "Wait for a pullback" is not a plan; $94.83 is. It gives a limit order a price, a stop a place to sit beneath, and therefore a position size — which is the difference between an intention and a trade.

It is worth being honest about why these levels work when they do. There is no known mechanism by which markets respect 61.8%. What there is, is a very large number of participants watching the same three lines drawn from the same obvious swing, which is enough to produce real orders at them.

That also explains the failure mode. Drawn from a different high or low, the levels move, and it is always possible to find an anchor pair that puts a line where price happened to turn. Fitting the tool after the fact tells you nothing.

Used properly it is a planning aid and nothing more. The levels give the pullback a price; whether to take the trade at that price is a question structure has to answer.

Why it matters

Retracement levels give a pullback entry a specific price to plan around, which turns a vague "wait for a dip" into a stop distance you can size from.