A tool for measuring pullbacks and projections.

The Fibonacci sequence is a series of numbers where each is the sum of the two before it (0, 1, 1, 2, 3, 5, 8, 13, 21...). Dividing numbers in the sequence by their neighbors produces ratios that converge toward specific values — roughly 61.8%, 38.2%, and 23.6% — which traders apply to price charts as retracement and extension levels.

In trading, these ratios are applied as a tool for measuring how far price is likely to pull back within a trend (retracement) or extend beyond a prior move (extension), based on the idea that markets often reverse or pause near these specific proportional levels rather than at arbitrary points.

It's worth being direct about the theory's foundation: there's no rigorous causal mechanism proven for why these particular ratios should matter to price behavior — the case for using them rests on their widespread use by market participants (making them somewhat self-fulfilling) and on long-observed pattern tendencies, not on an underlying law of markets.

A Fibonacci retracement is drawn between a significant swing low and swing high (or vice versa in a downtrend), with horizontal lines plotted at the key ratios — most commonly 23.6%, 38.2%, 50%, 61.8%, and sometimes 78.6% — marking potential support levels during a pullback in an uptrend, or resistance during a bounce in a downtrend.

The 61.8% level (often called the 'golden ratio' retracement) and the 50% level (not technically a Fibonacci ratio, but conventionally included) are the two most commonly watched levels — a pullback that holds near one of these is often read as the broader trend reasserting itself.

Retracement levels are typically used alongside other confirmation — a candlestick reversal pattern, a moving average, or a prior support/resistance level lining up at the same price — rather than traded purely because price reached a specific Fibonacci percentage.

Fibonacci extensions project potential price targets beyond the original move, using ratios like 127.2%, 161.8%, and 261.8% measured from the same swing points used for retracement. They're used to estimate how far a trend might continue after a retracement completes and the prior direction resumes.

Extensions are commonly used to set profit targets once a trade has been entered on a retracement — the 161.8% extension in particular is widely referenced as a common target level for where an extended move might pause or reverse.

As with retracements, extension levels work as a rough guide for where to watch for a reaction, not a guarantee that price will reach or respect that exact level — actual moves frequently fall short of or overshoot these projections.

Confluence is when a Fibonacci level lines up closely with another independent signal — a prior swing high or low, a round number, a moving average, or a trend line — at roughly the same price. The idea is that a level supported by multiple independent reasons carries more weight than a Fibonacci level alone.

Traders using Fibonacci tools generally look for this kind of confluence rather than treating any single retracement or extension level as significant purely because it's a Fibonacci ratio, since price naturally passes through all the standard ratios during any meaningful move and most won't produce a reaction.

Building a habit of checking for confluence is one of the more practical ways Fibonacci analysis is kept from becoming an exercise in finding a ratio to justify a decision already made — the level needs independent support to be worth acting on.