FibFibonacci Retracement

What is Fib?

The Fibonacci sequence (1, 1, 2, 3, 5, 8, 13...) was documented by Italian mathematician Leonardo Pisano around 1200 AD. The ratios derived from the sequence — 0.382, 0.5, 0.618, 1.618 — appear surprisingly often in natural patterns.

Ralph Elliott was the first to apply Fibonacci ratios to market structure in the 1930s. The empirical justification for using Fibonacci levels in trading is partly mathematical elegance and partly behavioral: enough traders watch the 38.2%, 50%, and 61.8% retracements that price reactions at those levels become self-fulfilling.

Category

Pullback / extension levels

Default settings

Last swing high to swing low

Signal range

0% to 161.8% extensions

Introduced by

Fibonacci sequence: Leonardo Pisano, ~1200; applied to markets: Ralph Elliott, 1930s

How Fib works

Application is mechanical. After a clear swing move, anchor the Fibonacci tool from the swing low to swing high (for uptrend pullbacks) or vice versa (for downtrend pullbacks). The tool automatically plots horizontal lines at:

0% (swing high) 23.6% retracement 38.2% retracement 50% retracement (not technically a Fib ratio, but widely watched) 61.8% retracement (the 'golden ratio') 78.6% retracement (deep pullback) 100% (swing low) Extensions: 127.2%, 161.8% (projected profit targets)

The 38.2 - 61.8 zone is called the 'golden pocket' and is the highest-probability retracement zone for trend continuation entries.

How to use Fib

Two essential applications.

1. Trend pullback entries: In an established uptrend, wait for a pullback into the 38.2 - 61.8% retracement zone of the most recent leg. Combine with horizontal support and a momentum confirmation (RSI bounce, bullish engulfing candle) for entries.

2. Extension targets: Use 127.2% and 161.8% extensions to project profit targets after a confirmed breakout. The 1.618 extension is statistically the most common target for swing moves in trending markets.

Fibonacci levels work best with confluence. A 61.8% retracement that also sits on a horizontal support level and a 50 EMA is much higher probability than a 61.8% retracement in isolation. Without confluence, treat Fib levels as guideposts, not trade triggers.

Want more practical context? Look up unfamiliar terms in the forex glossary, or see how indicators stack on real charts in the trading blog.

Fib FAQ