Fibonacci Retracements and Extensions

Fibonacci tools are among the most widely used in technical analysis. Based on the Fibonacci sequence, these levels help identify potential support, resistance, and price targets.

What is Fibonacci?

The Sequence

Fibonacci Numbers: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89...

Pattern: Each number = sum of previous two

Key Ratios

Derived From Sequence:

• 0.236 (23.6%)
• 0.382 (38.2%)
• 0.618 (61.8%) - the inverse of the golden ratio (1.618)
• 0.786 (78.6%) - the square root of 0.618

Not a Fibonacci ratio: 50% does not come from the sequence. It comes from Dow Theory's half-retracement and is shown on the tool because traders watch it.

Why It Works

Theories:

• Self-fulfilling prophecy: many traders watch the same levels
• Psychological levels
• In tests, the levels did no better than matched non-Fibonacci levels

Fibonacci Retracements

Definition

Retracement:

• Measure of pullback
• Within larger move
• Potential support/resistance

Key Retracement Levels

Most Important:

• 38.2% - Shallow retracement
• 50.0% - Moderate retracement
• 61.8% - Deep retracement (golden)

Less Common:

• 23.6% - Very shallow
• 78.6% - Very deep

Drawing Retracements

In Uptrend:

1. Identify swing low
2. Identify swing high
3. Draw from low to high
4. Levels appear automatically

In Downtrend:

1. Identify swing high
2. Identify swing low
3. Draw from high to low
4. Levels appear automatically

Trading Retracements

Uptrend Pullback

Strategy:

1. Identify uptrend
2. Draw Fib from swing low to high
3. Wait for pullback to Fib level
4. Buy at 38.2%, 50%, or 61.8%
5. Stop below next Fib level
6. Target new highs

Downtrend Pullback

Strategy:

1. Identify downtrend
2. Draw Fib from swing high to low
3. Wait for rally to Fib level
4. Sell at 38.2%, 50%, or 61.8%
5. Stop above next Fib level
6. Target new lows

Entry Techniques

Options:

• Limit order at level
• Wait for price action confirmation
• Zone entry around level

Fibonacci Extensions

Definition

Extension:

• Project price beyond swing
• Target levels
• Measure continuation

Key Extension Levels

Most Important:

• 127.2%
• 161.8% - Golden extension
• 200.0%
• 261.8%

Drawing Extensions

Process:

1. Identify swing low (point A)
2. Identify swing high (point B)
3. Identify pullback low (point C)
4. Draw from A to B, then to C
5. Extensions project from C

Using Extensions as Targets

Profit Targets

Common Targets:

• 127.2% - Conservative
• 161.8% - Standard
• 200.0% - Extended

Target Selection

Based On:

• Market conditions
• Trend strength
• Other confluence

Partial Profits

Strategy:

• First partial at 127.2%
• Second at 161.8%
• Runner to 200%+

Fibonacci Confluence

Level Confluence

Stronger When:

• Fib aligns with support/resistance
• Fib aligns with moving average
• Fib aligns with trend line

Multiple Fib Confluence

Concept:

• Different Fibs from different swings
• Levels that align = stronger

Called: Fibonacci clusters

Finding Confluence

Process:

1. Draw multiple Fib retracements
2. Note overlapping levels
3. Those areas are high probability

Fibonacci Time Zones

Concept

Time-Based:

• Vertical lines at Fib intervals
• Project when moves may occur
• Less commonly used

Application

Use:

• Potential reversal times
• Market turning points
• Secondary to price levels

Common Fib Mistakes

Arbitrary Points

Problem: Drawing from wrong swing points

Solution: Use clear, significant swings

Forcing Levels

Problem: Trying to make every move fit Fib

Solution: Only use when clear application

Ignoring Context

Problem: Trading Fib alone

Solution: Combine with other analysis

Wrong Direction

Problem: Drawing against trend

Solution: Draw Fibs in trend direction

Practical Fib Tips

Most Important Levels

Focus On:

• 50% and 61.8% retracements
• 161.8% extension
• Don't clutter with all levels

Trend Context

Remember:

• Shallow pullbacks (38.2%) = strong trend
• Deep pullbacks (61.8%+) = weakening
• Beyond 78.6% = trend may be changing

Zone Approach

Better Practice:

• Think of levels as zones
• Not exact prices
• Give room for imprecision

Multiple Fibs

Advanced:

• Draw from different swings
• Find cluster zones
• Higher confidence areas

Fib Trading Plan

Setup

Requirements:

1. Clear trend identified
2. Significant swing for Fib
3. Price approaching Fib level
4. Confluence with other factors

Entry

Process:

1. Price reaches Fib zone
2. Wait for confirmation
3. Enter with stop defined

Targets

Use:

• Fib extensions
• Previous swing points
• Other resistance/support

Key Takeaways

• Fibonacci ratios based on mathematical sequence
• Retracements identify pullback levels
• Extensions project price targets
• 50% and 61.8% are the most watched retracements. In tests for Forex Trading Strategies (ch. 4), against matched non-Fibonacci levels at the same depth, 61.8% came out −0.2 points, and every level sat within ±2.2 points of its control, which is inside the margin of error
• 161.8% key extension level
• Confluence increases reliability
• Use clear swing points for drawing
• Combine with other analysis methods

What's Next?

Review the complete basics of technical analysis.

This article is for educational purposes only and does not constitute financial advice.