Fibonacci retracement is a technical analysis tool used to identify potential levels of support and resistance in a price chart. It is based on the idea that price movements in financial markets tend to retrace a predictable portion of a move, after which they continue in the original direction.


The Fibonacci retracement levels are calculated based on the Fibonacci sequence, which is a series of numbers in which each number is the sum of the two preceding numbers (e.g., 0, 1, 1, 2, 3, 5, 8, 13, 21, etc.). The retracement levels are derived from the ratios between the numbers in the Fibonacci sequence, which are 23.6%, 38.2%, 50%, 61.8%, and 100%.


To use the Fibonacci retracement tool, a trader first identifies a significant price move, either up or down, and draws a horizontal line between the low and high points of the move. The retracement levels are then drawn as horizontal lines that correspond to the Fibonacci ratios. The 50% retracement level is not based on a Fibonacci ratio, but it is a commonly used level because it represents the midpoint of the move.


Traders use the Fibonacci retracement levels to identify potential levels of support and resistance. The 38.2% and 50% levels are considered moderate support or resistance levels, while the 61.8% level is a strong level. The 23.6% level is a weak level, and the 100% level represents a complete retracement of the move.


For example, suppose a stock has a significant price move from $50 to $70, and a trader draws the Fibonacci retracement levels from the low of $50 to the high of $70. The retracement levels would be drawn at $59.07 (23.6%), $61.94 (38.2%), $65 (50%), $68.06 (61.8%), and $50 (100%). These levels can then be used to identify potential areas of support and resistance in the future.


Fibonacci retracement is a popular technical analysis tool among traders and investors. However, it is important to note that it is not a perfect predictor of future price movements and should be used in conjunction with other technical analysis tools and market factors. Additionally, traders should always consider the risks involved in trading and use appropriate risk management techniques.