What Is Fibonacci Retracement?

Fibonacci retracement uses horizontal lines at key percentages (23.6%, 38.2%, 50%, 61.8%, and 78.6%) between a significant high and low to identify potential support or resistance zones. These ratios come from the Fibonacci sequence — a series where each number is the sum of the two before it (0, 1, 1, 2, 3, 5, 8, 13...).

The 61.8% level — called the 'golden ratio' — is the most significant. In a trending stock, pullbacks often find support near the 38.2% or 61.8% Fibonacci retracement before the trend continues. The 50% level is also heavily watched even though it's not a Fibonacci ratio per se.

Fibonacci retracements are drawn from a swing low to a swing high (for an uptrend). If a stock rallies from $50 to $100, the 61.8% retracement would be at $61.80 ($100 - $38.20). This level often provides strong support because many traders are watching it simultaneously.