Fibonacci Retracement

Fibonacci retracement is a technical analysis tool based on the mathematical sequence discovered by Leonardo Fibonacci. In trading, horizontal lines are drawn at key Fibonacci ratios (23.6%, 38.2%, 50%, 61.8%, and 78.6%) between a significant high and low on the chart. The theory is that price tends to retrace a predictable portion of a move before continuing in the original direction.

The 61.8% level (also known as the "golden ratio") is considered the most significant. Many traders look for price to bounce at this level during a pullback, making it a popular entry point for trend-following strategies. The 38.2% level is watched for shallow retracements in strong trends, while deeper retracements to 78.6% suggest the trend may be weakening.

Fibonacci works best when combined with other forms of analysis — if a Fibonacci level lines up with a previous support/resistance zone and a moving average, the confluence makes it more reliable. Used in isolation, Fibonacci levels can produce false signals like any other tool. The key is treating them as zones of interest rather than exact turning points.