Trading Defined
Indicators and ToolsIntermediate

Fibonacci Retracement and Extension

Fibonacci tools draw levels at ratios such as 38.2%, 50% and 61.8% of a previous move (retracements) or beyond it (extensions), which traders watch as possible turning points.

After a strong move, prices usually give some of it back before carrying on. Fibonacci retracements are a way of measuring that pullback: they mark 23.6%, 38.2%, 50% and 61.8% of the previous move as places where the pullback might end.1 Extensions project where the next leg might reach. The tools are popular and easy to use; the evidence that the specific ratios are special is weak. This entry shows how to draw and use them — and how to stay honest about what they can do.

Category
Indicators and Tools
Reading time
6 min
Also called
Fibonacci retracement, Fibonacci extension, Fib
Updated

Fibonacci levels in plain words

Suppose a stock rises from $40 to $60. It then dips. How far might the dip go? Fibonacci retracement marks levels at fixed fractions of the $20 move: 23.6% back ($55.28), 38.2% ($52.36), 50% ($50) and 61.8% ($47.64). Traders watch those prices as possible support.2

The ratios come from the Fibonacci sequence — 1, 1, 2, 3, 5, 8, 13, 21… — in which each number is the sum of the two before it.2 The 50% level is not a Fibonacci ratio, but it is included because traders watch half-way retracements anyway.

How to draw and use Fibonacci retracements, step by step

  1. Pick a clear swing

    Choose an obvious swing low and swing high (or high and low in a downtrend). See Swing High and Swing Low.

  2. Draw from one extreme to the other

    The tool is drawn between two extreme points; it plots the levels between them.2 In an uptrend, draw from the low to the high.

  3. Read the levels

    Retracements mark 23.6%, 38.2%, 50% and 61.8% of the move as possible support or resistance.2

  4. Look for confluence

    A level that lines up with old support, a moving average or a round number deserves more attention than one sitting in empty space. See Confluence.

  5. Wait for the market to react

    A level is a place to watch, not a reason to buy. Look for a reversal candle or a break of a short-term high before entering.

  6. Set stops beyond the next level

    If you buy at the 50% level, a stop just below 61.8% gives the trade room while defining the risk.

Worked examples

Example 1 — Calculating retracement levels

Levels

A stock rallies from a swing low of $40 to a swing high of $60. The move is $20.

Example 1 — Calculating retracement levels — calculation
23.6%: $60 − 0.236 × $20$55.28
38.2%: $60 − 0.382 × $20$52.36
50%: $60 − 0.5 × $20$50.00
61.8%: $60 − 0.618 × $20$47.64

Each level is the high minus that fraction of the move. In a downtrend you add the fractions to the low instead.

Example 2 — A trade at the 50% level

Retracement

The stock pulls back to $50.10, forms a hammer candle and turns up. A trader buys at $50.60 with a stop at $47.20 (below 61.8%) and a target at the old high of $60.

Example 2 — A trade at the 50% level — calculation
Risk per share$50.60 − $47.20 = $3.40
Reward per share$60 − $50.60 = $9.40
Reward-to-risk≈ 2.8 : 1

The level gave a place to look; the hammer gave the trigger; the next level gave the stop. See Risk-to-Reward Ratio.

Example 3 — An extension target

Extension

After holding at $50, the stock breaks above $60. The trader projects a 161.8% extension of the original $20 move from the swing low.

Example 3 — An extension target — calculation
Extension$40 + 1.618 × $20
Target$72.36

Extensions are a way to set targets beyond the old high. Like retracements, they mark possibilities, not destinations.

Figure 1

Retracement levels on a $40 → $60 move

Fibonacci retracement levels on a move from $40 to $60A rise from $40 to $60 is measured with Fibonacci levels: 23.6% at $55.28, 38.2% at $52.36, 50% at $50.00 and 61.8% at $47.64. The price pulls back to about $50, the 50% level, holds there and then rises to new highs.0% · $60.0023.6% · $55.2838.2% · $52.3650% · $50.0061.8% · $47.64100% · $40.00holds at 50%swing lowswing high
The pullback holds at about $50, the 50% level, before the price resumes upward. Levels are measured down from the swing high.

Common Fibonacci levels

AspectTypical reading
23.6%Shallow pullback — a very strong trend
38.2%Moderate pullback in a healthy trend
50%Half the move retraced (not a Fibonacci ratio, but widely watched)
61.8%Deep pullback; many treat a break below as a warning
127.2% / 161.8% extensionsPossible targets beyond the previous high

How traders use Fibonacci tools

  • Planning pullback entries

    Retracement levels give specific prices to watch during a pullback in a trend. See Pullback Trading.

  • Placing stops

    A stop beyond the next deeper level is a common, rule-based choice.

  • Setting targets

    Extensions project where a move might reach after breaking the previous high or low.

  • Finding confluence

    Levels that coincide with other support or resistance often draw more attention from traders.

Advantages and disadvantages

Advantages

  • Gives specific price levels to plan around.
  • Quick to draw on any chart and timeframe.
  • Widely watched, so reactions can be self-reinforcing.

Disadvantages

  • Results depend on which swing you choose — two traders can draw different levels.
  • With five or six levels, price will almost always be near one of them.
  • There is little evidence the ratios themselves have special predictive power.
  • Easy to fit to a chart after the fact.

Going deeper

Read as far as you need. Each level builds on the one before it.

Use the obvious swing

Beginner

If you have to search for the right low and high, the swing is not obvious enough. Use the clear extremes that most traders would pick.

Where the ratios come from

Intermediate

Dividing a Fibonacci number by the next one approaches 0.618 (for example 55 ÷ 89 ≈ 0.618); dividing by the number two places later approaches 0.382 (34 ÷ 89 ≈ 0.382). 0.236 comes from three places later. The extension ratio 1.618 is the reciprocal of 0.618, also known as the golden ratio.

Self-fulfilling, not mystical

Advanced

Many traders watch the same levels, so orders cluster around them, which can create reactions. That is a reasonable explanation for why levels sometimes work. Claims that markets follow the golden ratio because of a natural law have no solid evidence behind them; test any Fibonacci strategy as you would any other. See Backtesting.

In some trading communities, the zone between 61.8% and 65% is called the “golden pocket”. It is a community term without a standard definition.

Common mistakes

  1. Buying blindly at a level

    Wait for price to react; a level is a place to watch, not a trigger.

  2. Redrawing until it fits

    Moving the anchor points until past prices line up with levels proves nothing.

  3. Ignoring the trend

    Retracements are for pullbacks within trends. In a range or a reversal, the levels mean little.

  4. Using every level as support

    With many levels, one will always be close. Focus on those with confluence.

Check your understanding

Test yourself before moving on. Each answer comes with an explanation.

Q1A move goes from $100 to $150. Where is the 61.8% retracement?
Q2Why is the 50% level included even though it is not a Fibonacci ratio?

Key points to remember

  1. Retracements mark 23.6%, 38.2%, 50% and 61.8% of a prior move as possible support or resistance.
  2. Draw from an obvious swing low to swing high (or the reverse in a downtrend).
  3. Extensions such as 161.8% project possible targets beyond the old extreme.
  4. Levels work best with confluence and confirmation — never on their own.
  5. The ratios are popular, not proven: test before you trust them.

Frequently asked questions

Which Fibonacci level is most important?

Traders most often watch 38.2%, 50% and 61.8%. No level is reliably stronger on its own; the one that lines up with other support or resistance usually matters most.

Do Fibonacci levels really work?

They are widely used, so price sometimes reacts at them. But with several levels close together, price will often be near one by chance. Use them as a planning tool, and test any strategy built on them.

How do I draw Fibonacci in a downtrend?

Draw from the swing high down to the swing low. The levels then mark how far a bounce might go before the downtrend resumes.

Further learning

Sources

This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.

  1. StockCharts ChartSchool. Fibonacci Retracements (opens in a new tab) Checked .
  2. Fidelity. Fibonacci Retracement (opens in a new tab) Checked .

Read more elsewhere

Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. Trading Metrics is our sister site, under the same ownership; we are not affiliated with any other publisher linked above. Last reviewed . Report an error or request a source credit.