Fibonacci ratios

Named for the medieval Italian mathematician Leonardo Fibonacci, this tool is built on a number sequence (1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144...) where each number is the sum of the two before it. Dividing a number by the one after it converges toward 0.618; dividing by the one two places ahead converges toward 0.382, ratios often called the "golden mean."

Retracement levels: 0.236, 0.382, 0.500, 0.618, 0.764

Extension levels: 0, 0.382, 0.618, 1.000, 1.382, 1.618

You won't need to calculate these by hand, charting software plots them automatically, but understanding the logic behind them is worthwhile. Because so many traders watch the same levels and place orders around them, the levels become somewhat self-fulfilling.

To apply Fibonacci tools, you first need to identify swing highs (a candle with at least two lower highs on either side) and swing lows (a candle with at least two higher lows on either side).

Retracement levels are used as potential support (in an uptrend) or resistance (in a downtrend) where a pullback might stall before the prior trend resumes. In practice, price often, but not always, respects one of these levels; the 0.382, 0.500, and 0.618 levels tend to see the most action, while 0.236 is generally the weakest. There's no way to know in advance which level will hold, and the market sometimes ignores all of them and keeps moving.

Extension levels are used the opposite way, as potential profit-taking targets once a trend resumes after a retracement. Again, there's no guaranteed level; traders often use the 0.382, 0.618, 1.000, and beyond as reasonable targets, but must stay flexible.

Two persistent challenges with Fibonacci trading: there's no way to know in advance which level will act as support/resistance, and different traders will often select different swing highs and lows to measure from, adding a subjective element. Fibonacci levels work best as one confirming tool among several, never as a sole basis for entering or exiting a trade. Stops are typically placed just beyond the swing high or low used to draw the levels, which means accepting a meaningful amount of risk relative to the likely reward.