Fibonacci retracements mark potential support and resistance levels after a price move, helping commodity traders spot likely pullbacks, entries, and exits.
In this Fibonacci technical analysis guide, we focus on Fibonacci retracement as a trading tool.
Read on to learn what Fibonacci retracement is, how it occurs on trading chars, and why people continue to use this old mathematical formula to trade strategically.
We also distinguish the difference between Fibonacci retracements from Fibonacci extensions.
What Is Fibonacci Retracement?
Fibonacci trading tools utilize special ratios that naturally occur in nature to help predict points of support or resistance.
Fibonacci numbers are 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, etc. The sequence occurs by adding the previous two numbers (i.e. 1+1=2, 2+3=5)
The main ratio used is.618, this is found by dividing one Fibonacci number into the next in sequence Fibonacci number (55/89=0.618).
Speculation On Naturally Recurring Patterns
The logic most often used by Fibonacci based traders is that since Fibonacci numbers occur in nature and the stock, futures, and currency markets are creations of nature – humans.
Therefore, the Fibonacci sequence should apply to the financial markets.
There are many other Fibonacci tools used by traders, they include:
How To Calculate Fibonacci Retracement Levels
Arguably the most heavily used Fibonacci tool is the Fibonacci Retracement. To calculate the Fibonacci Retracement levels, a significant low to a significant high should be found.
From there, prices should retrace the initial difference (low to high or high to low) by a ratio of the Fibonacci sequence, generally the 23.6%, 38.2%, 50%, 61.8%, or the 76.4% retracement.
A Demonstration Of Retracement Levels
The examples in this section use the S&P 500 Depository Receipts (SPY), since the S&P 500 is a broad measure of human nature – making it an ideal case for the Fibonacci sequence.
Nevertheless, the Fibonacci sequence is applied to individual stocks, commodities, and forex currency pairs quite regularly.
The chart above shows the 38.2% retracement acting as support for prices.
How Is The Trendline Drawn?
Note that a trendline was drawn from a significant low (beginning of trend) to a significant high (end of trend); the trading software calculated the retracement levels.
The chart below of the SPY’s shows that Fibonacci Retracements can be used to retrace downtrend moves as well:
Notice after the bottom in the S&P 500, that price rallied to the 23.6% retracement level and then was promptly rejected downwards.
How It This Show In Price Movements?
After breaking resistance a few months later, the 23.6% retracement became support (see: Support & Resistance). The price rallied up to the 50% retracement level, where it ran up against resistance.
Price continued to fluctuate between the 38.2% retracement level (acting as support) and the 50% retracement level (acting as resistance).
There are many other Fibonacci tools like Fibonacci Arcs available to stock, forex, options, CFD, or futures traders.
Further Reading on Trend Indicators
These trend tools complement Fibonacci Retracement: Andrew’s Pitchfork, Keltner Channel, and Typical Price Moving Average.
FAQs
What are the Fibonacci retracement levels in trading?
The Fibonacci retracement levels are 23.6%, 38.2%, 61.8%, and 78.6%. Traders also use 50% as a retracement ratio. The 50% mark is used as a mid-point between two price positions considered significant. Then, traders can create new retracement levels to determine possible support and resistance price points.
What is the difference between Fibonacci retracement and extension?
The primary difference between Fibonacci retracements and Fibonacci extensions as trading tools is that extensions are typically used to determine when to cash out from a trade. Retracements, on the other hand, are used to determine a desirable entry point, although they can also be used to plan an exit strategy.
Technical analysis is most widely used in CFD and forex trading. If you’re ready to apply these techniques, browse our vetted CFD brokers or forex brokers.
Update history
This page was revised 5 times between August 2020 and April 2026.
Added broker recommendation section with links to CFD and forex broker listings in the Fibonacci retracement vs. extension comparison.
Removed broker comparison section and consolidated Further Reading, while rewording one explanatory sentence for clarity and adding three complementary trend tools.
Added introductory overview, restructured content with proper heading hierarchy, expanded FAQ section with two new Q&A pairs, and reorganized broker recommendations into dedicated section.
Added call-to-action content alert component to the Further Reading section.
Added introductory explanation of Fibonacci ratios and trading tools, expanded Fibonacci Retracements section with detailed examples, and reorganized content with new "How to Get Started Trading" section.
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