Fibonacci Retracements are technical analysis tools that use key ratios to identify potential support and resistance levels during market corrections
What Is a Fibonacci Retracement in Trading?
Fibonacci retracement levels are horizontal lines on a chart, usually marked at 23.6%, 38.2%, 50%, 61.8%, and 78.6%. You draw them by anchoring the tool to a clear swing low and swing high (or swing high to swing low in a downtrend). The grid gives you likely areas where a pullback can stall, bounce, or roll over—support in an uptrend, resistance in a downtrend.
The idea comes from the Fibonacci sequence (0, 1, 1, 2, 3, 5, 8, 13, 21…). From it you get the golden ratio, about 1.618. Its inverse is 0.618 (61.8%), which is why the 61.8% level gets the most attention.
Whether it’s “math” or just crowd behavior, these levels show up often enough that traders keep them on the radar across FX, equities, and crypto. More detail here: Fibonacci trading.
In practice, retracements are about planning. They help you map where a trend might offer a cleaner entry on a dip, where you might take partials, and where your idea is probably wrong. They also make risk/reward easier to structure because the levels give you obvious “line in the sand” areas for stops and targets.
You can use them on basically any liquid market and any timeframe. Scalpers might work off a 5-minute EUR/USD chart, while swing traders might anchor levels on the daily S&P 500 or weekly Bitcoin chart. The key isn’t the market—it’s picking a swing that actually matters.
How to Draw Fibonacci Retracement Levels (Step-by-Step)
Open the drawing tools menu.
Select the Fibonacci retracement tool.
In an uptrend, click the swing low (in a downtrend, click the swing high).
Drag to the opposite extreme to set the full move.
The platform plots 23.6%, 38.2%, 50%, 61.8%, and 78.6% automatically.
Tweak colors/labels so you can read the chart fast without clutter.
thinkorswim-specific walkthroughs are here: specialized guides on thinkorswim functionality.
How Do Fibonacci Retracement Levels Work?
Fibonacci retracement levels are mainly a way to mark probable support and resistance zones during a correction. They don’t predict the future, but they do highlight where reactions are more likely because a lot of traders are watching the same spots.
Fibonacci Retracement Levels: Key Ratios Table
Retracement Level | Fibonacci Ratio | Significance in Trading |
|---|---|---|
23.6% | Shallow retracement | Often just a quick dip; reactions can be hit-or-miss |
38.2% | Core Fib ratio | Common pause/bounce area in healthy trends |
50% | Psychological midpoint | Not a true Fib number, but traders respect the “halfway back” level |
61.8% | Golden ratio | The big one—often a make-or-break zone for continuation vs. reversal |
78.6% | Deep retracement | Last “trend still alive” area; breaks here often change the whole structure |
Why Is the 61.8% Fibonacci Level So Important?
The 61.8% level is the one most traders treat like a decision zone. If price tags 61.8% and snaps back with momentum, it often turns into a clean continuation entry. On the other hand, if price slices through 61.8% and can’t reclaim it, that’s when you start thinking “this isn’t just a pullback anymore.”
Do Fibonacci Levels Work Because Traders Watch Them?
Fibs work partly because they’re popular. When a ton of traders are stacking limit orders, stops, and take-profits around the same levels, you get real order-flow reactions. That’s why you’ll see clean bounces or sharp rejections even when there’s no obvious fundamental catalyst.
It’s not magic. It’s crowd positioning—retail flow, systematic models, and sometimes institutions all leaning on the same map.
Identifying Swing Points and Understanding Retracements
How Do You Identify Swing Highs and Swing Lows?
A swing high is a local peak that forms before price drops. A swing low is a local trough that forms before price pushes higher. These are your anchors—if you pick bad anchors, the Fib levels are basically noise.
What usually works:
Match the timeframe to your trade. A day trader might anchor swings on a 5–15 minute chart, while a swing trader is usually better off with daily or weekly structure.
In an uptrend, find the swing low that started the leg and the swing high where the leg topped out (before the pullback).
In a downtrend, do the opposite—swing high to swing low.
Make sure it’s a meaningful move, not a tiny wiggle inside chop.
Example: a stock runs from $100 to $200. The Fib levels land around $177.20 (23.6%), $161.80 (38.2%), $150 (50%), $138.20 (61.8%), and $121.20 (78.6%). Those become your “if it gets here, watch the tape” zones for entries, partials, or stop placement.
How to Use Fibonacci in Trend Trading
In trends, retracements help you trade with the flow. In an uptrend, they act like support zones where buyers are willing to reload. In a downtrend, they’re resistance zones where sellers often defend and re-enter.
Fibonacci Retracement Example in an Uptrend
Say a technology stock rallies from $150 to $180. The 38.2% retracement is around $168.53 and the 50% level is $165. If price pulls into that pocket and holds, it’s often a decent long location because your invalidation is clear and your upside is back toward the highs.
Fibonacci Retracement Example in a Downtrend
Now flip it: Bitcoin drops from $50,000 to $40,000. The 38.2% retracement sits near $43,820 and the 50% level is $45,000. If price bounces into those levels and stalls, that’s where shorts often get interested—especially if you see rejection wicks and fading volume on the push up.
How Do Fibonacci Extensions Set Profit Targets?
Retracements help you trade the pullback inside the move. Extensions help you plan targets beyond the old high/low after price resumes the trend. If you only use retracements, you’re often good on entries but vague on exits.
Common Fibonacci Extension Levels
Common extension targets traders use:
127.2%: first continuation target after the prior high/low breaks
161.8%: the main “golden ratio” projection in strong trends
200%: measured-move style target (double the original leg)
261.8%: stretch target for runaway trends
How to Combine Retracements and Extensions in One Strategy
A common workflow is simple: trade the pullback into a key retracement (often 38.2% or 61.8%), then manage the winner into extensions like 127.2% and 161.8%. If the market is ripping, you let a runner try for 200%+.
Once you’ve got the swing high, swing low, and the retracement pivot, you can project those extension levels cleanly. For deeper dives: comprehensive Fibonacci trading strategies.
Pullback vs. Retracement: What’s the Difference?
A pullback is the general idea of price correcting inside a trend. A retracement is the measurement—how much of the prior move got given back.
That percentage matters because it hints at trend strength. Shallow retracements (23.6–38.2%) usually mean the trend is strong and dips are getting bought quickly. Deep retracements (61.8–78.6%) tell you momentum is fading, and the market is closer to flipping structure. More on the strategy angle here: https://capital.com/en-int/learn/technical-analysis/fibonacci-retracement-strategy.
Using the Fibonacci Retracement Tool on Charting Platforms
Most platforms make this easy now. TradingView, thinkorswim, TradeStation, NinjaTrader, TrendSpider, and MotiveWave all have Fib tools that plot the levels automatically, so you’re not doing hand math while the market is moving.
What Confirms Fibonacci Levels? Best Indicators for Confluence
Technical Tool | How It Confirms Fibonacci Levels | Application Example |
|---|---|---|
Relative Strength Index (RSI) | Shows oversold/overbought conditions near a Fib zone | RSI at 28 as price tests 61.8% can signal seller exhaustion |
Moving Averages | EMA/SMA confluence adds “real” structure to a Fib level | 38.2% lines up with the 50 SMA and holds as support |
Candlestick Patterns | Gives timing—rejection/absorption at the level | Hammer at 61.8% supports a long entry idea |
Volume Analysis | Confirms whether the level is defended or broken with force | Volume surge on reclaim of 50% suggests real buying |
Elliott Wave Principle | Wave relationships often map to Fib retracements/extensions | Wave 2 often retraces near 61.8% of Wave 1 |
How to Use RSI With Fibonacci Retracements
A classic combo is 61.8% retracement plus RSI oversold (<30) in an uptrend pullback. It’s not an automatic buy, but it’s a solid alert that the selling might be running out of fuel—especially if price action starts printing higher lows or reclaiming a key candle close.
Which Candlestick Patterns Confirm Fibonacci Levels?
Price action is what makes the level tradable. A hammer, bullish engulfing, or even a clean rejection wick at a Fib zone tells you buyers actually showed up. Same idea in downtrends with shooting stars or bearish engulfing patterns at Fib resistance.
If you want a practical confluence example using moving averages and RSI: confluence strategies with moving averages and RSI.
Entry and Exit Strategy
Example: EUR/USD trends up from 1.0800 to 1.1200 (about 400 pips). The 61.8% retracement comes in around 1.0952, so that becomes the main “watch zone.” Instead of buying the first touch, the trader waits for the market to show its hand—a bullish hammer prints and RSI dips under 30. With that alignment, the entry goes in around 1.0960.
For exits, one target is the prior swing high at 1.1200 (roughly +240 pips). If the trend is strong, the trader can also map the 161.8% extension near 1.1447. A common way to manage it is scaling out: take partials at 1.1200, then trail the rest toward the extension so you’re paid if it runs but protected if it snaps back.
Risk Management Framework
Fibs don’t replace risk management. They’re just reference points, so you still need hard rules:
Stop-Loss Placement: Put the stop beyond the next Fib level or beyond the swing structure (not right on the line). In FX terms, that’s often 10–20 pips past the level, depending on pair volatility.
Capital Risk Limit: Keep risk per trade around 1–2% so a bad streak doesn’t wreck the account.
Position Sizing: Size the trade from your stop distance, not from how “good” the setup feels.
Trailing Stops: Trail once price confirms—after a reclaim, after a new swing high, or after it tags the first target.
Reversal Detection: If price closes cleanly beyond 78.6% and can’t recover, treat it as a likely structure break, not “just another dip.”
Extensions (127.2%, 161.8%, 261.8%) work well for scaling out. You reduce exposure as price stretches, and you avoid turning a winner into a scratch because you got greedy.
Common Fibonacci Mistakes to Avoid
The fastest way to ruin Fib analysis is drawing it on every little zigzag. That turns your chart into spaghetti and makes every level look “important.”
Stick to swings that stand out to anyone looking at the chart—clean impulse legs, major highs/lows, obvious trend pivots. Futures traders talk about the same thing here: Professional futures trading guidance. Less lines, better decisions.
How to Spot Trend Reversals With Fibonacci Levels
The 78.6% level is often the “last call” for the trend thesis. If price breaks deep through it and holds below (or above in a downtrend), you usually need to reassess. At that point, the market is telling you the prior impulse leg is getting unwound, not just corrected.
Do Fibonacci Retracements Work in High Volatility?
In high-volatility tape, price can rip through multiple Fib levels like they aren’t there. That’s when you either zoom out to a higher timeframe or add a volatility filter like ATR or Bollinger Bands so you’re not treating every spike as a signal. Clean structure first, Fib second.
Combining Fibonacci with Other Technical Indicators
Fibs get more reliable when they line up with other signals. On their own, they’ll give you plenty of “almost” trades. With confluence—trend, momentum, price action, and volume—you filter a lot of junk.
Limitations and Best Practices
Fibonacci is useful, but it’s not a cheat code. It has real limitations, and pretending otherwise is how traders overtrade it.
What Are the Limitations of Fibonacci Retracement?
Subjective anchors: two traders can pick different swing points and end up with different levels
No guaranteed reaction: price can ignore a Fib level completely
Crowd effect: sometimes it works mainly because traders expect it to
Chop kills it: range-bound markets create fake breaks and messy signals
No timing: it tells you where, not when
Fibonacci Retracement Best Practices
Use Fib as a map, then let other tools tell you if the level is actually holding. Moving averages help with trend bias, RSI/MACD help with momentum, candlesticks help with timing, and volume helps confirm whether a move is real or just a stop run.
How to Backtest Fibonacci Retracement Strategies
Test it the way you trade it—same market, same timeframe, same session. Fibs behave differently on EUR/USD than they do on small-cap equities or meme coins, and they behave differently in London than in the dead Asia hours. If you want examples across markets and timeframes: Analysis of multiple market applications.
Elliott Wave traders also lean on Fib relationships a lot, and that overlap is one reason the levels stay popular. Even if you don’t trade waves, it’s another reminder that markets often move in recognizable legs—and Fib levels are a quick way to measure those legs without overcomplicating the chart.
How Do You Turn Fibonacci Levels Into Repeatable Improvements Over Time?
Fibonacci retracements and extensions can help you define entries, invalidation points, and targets, but the bigger edge comes from tracking how those decisions perform across many trades. After each setup, note the swing points you anchored, which levels mattered (38.2%, 50%, 61.8%, 78.6%), what confirmation you used (RSI, moving averages, candlesticks, volume), and whether volatility conditions changed the outcome. Over time, reviewing that log makes it easier to spot patterns—like which markets respect 61.8% more often, whether deep retracements tend to fail for your style, or which confluence signals reduce false entries. Using a structured trading journal also helps you separate “good process, bad outcome” from avoidable mistakes in risk, sizing, or exits. A tool such as Rizetrade trading journal analytics and performance tracker dashboard can make those reviews more consistent by organizing PnL, metrics, and screenshots so your Fibonacci-based rules can be tested and refined.