Fibonacci Retracement

Fibonacci retracement is a technical analysis tool that divides a previous price move into sections using ratios derived from the Fibonacci number sequence. After a market has risen or fallen sharply, traders draw horizontal lines at set percentages of that move, most often 23.6%, 38.2%, 50%, 61.8% and 78.6%, and watch those levels as places where a pullback might stall before the main trend resumes.

The tool is built into almost every charting platform and is used on shares, currencies, commodities and cryptocurrencies. It belongs to the same family of ideas as Elliott wave theory, which also uses Fibonacci ratios, and it is usually combined with other signals such as trading volume or moving averages. The levels have no proven link to how markets work; their influence, where it exists, may come largely from the fact that many traders watch the same lines.

Imagine a hiker who climbs a hill and then walks part of the way back down before continuing upwards. Fibonacci retracement is a way of guessing how far back down the hiker might go before turning round again: perhaps about a third of the way, perhaps half, perhaps nearly two-thirds.

Traders mark those points on a price chart. If a price that has risen strongly starts to fall, they watch to see whether it steadies near one of the marked lines. The lines are not magic. They are simply reference points that many people share, which is why prices sometimes do react around them.

The Fibonacci sequence is named after Leonardo of Pisa, known as Fibonacci, who described it in his book Liber Abaci in 1202. Each number is the sum of the two before it: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34 and so on. As the numbers grow, dividing one by the next approaches about 0.618, dividing a number by the one two places later approaches about 0.382, and three places later about 0.236. The ratio 0.618 is linked to the so-called golden ratio of about 1.618. The 50% level is not a Fibonacci ratio but is included because traders commonly watch halfway points, and 78.6% is the square root of 0.618.

For a price that has risen from a low to a high, the retracement level for a chosen ratio is:

• $\text{High}$ is the top of the move being measured.
• $\text{Low}$ is the starting point of the move.
• $r$ is the retracement ratio written as a decimal, such as 0.382 or 0.618.

Suppose a cryptocurrency climbs from 100 to 200. The move is 100 points. The 38.2% level is 200 − 100 × 0.382 = 161.8, the 50% level is 150, and the 61.8% level is 200 − 100 × 0.618 = 138.2. A trader expecting the uptrend to continue might watch for buying near 161.8 or 138.2. For a falling market, the calculation is reversed: the levels are measured upwards from the low to show where a rebound might stall. Related tools, called Fibonacci extensions, project levels beyond the high, such as 161.8% of the move, as possible targets.

• Entry points. Traders who want to buy in an uptrend may place a limit order near a retracement level rather than chase the price.
• Risk control. A stop-loss order is often placed just beyond the next level, on the view that a deeper fall means the trend has failed.
• Confluence. A level gains weight in traders' eyes when it lines up with a previous price peak, a moving average or a round number.
• Confirmation. Many wait for a price reaction at the level, such as a strong candle on a candlestick chart or a turn in the relative strength index, before acting.

In crypto markets, retracement levels are widely discussed after big rallies or crashes in assets such as Bitcoin, partly because their high volatility makes the levels easy to draw. A deep fall that holds near a level and then recovers is sometimes described as a healthy correction, while a break below the last level is taken as a sign of a reversal.

• Choice of points. The result depends on which low and high are chosen, and different analysts often pick different ones.
• Many levels. With five or more lines on a chart, price is almost always near one of them, which makes the tool look accurate in hindsight.
• Self-fulfilling at best. Any reaction at the levels may reflect crowd behaviour rather than an underlying rule, and it can disappear when conditions change.
• Weak research support. Studies have not found strong evidence that Fibonacci levels predict turning points better than chance.

Most practitioners therefore treat Fibonacci retracement as a way of organizing a chart rather than as a forecast. It is part of wider trend analysis, not investment advice.