What Are Fibonacci Retracement Levels, and What Do They Tell You?

Fibonacci retracement levels are among the go-to tools for traders looking to identify potential support and resistance zones during pullbacks. Rooted in the Fibonacci sequence, these levels help traders spot key price areas where securities might pause, reverse, or continue trending. We take you through what you need to know below.

Understanding Fibonacci Retracement Levels

Fibonacci retracement levels are used to find potential support and resistance areas by measuring how much a security's price pulls back before continuing in its trends.

Key levels like 38.2%, 50%, and 61.8% are widely used because they align with market psychology, support and resistance zones, and technical indicators like moving averages.

Historical Background

The Fibonacci sequence has its roots enshrined in ancient mathematics, initially appearing in Indian and Arabic traditions before being introduced to Western Europe by Leonardo of Pisa (Fibonacci) in the 13th century. His book, Liber Abaci, popularized the sequence and helped replace Roman numerals with the more efficient Hindu-Arabic number system.

Beyond mathematics, Fibonacci's work has influenced fields like science, nature, architecture, and finance, especially because of its connection to the golden ratio, which appears in everything from plant growth to technical analysis.

How Fibonacci Retracement Levels Work

To apply the retracement levels, traders need to identify the market trend. Is the security or market in an uptrend, with higher highs and higher lows, or conversely in a downtrend, with lower highs and lower lows?

Once the trend is identified, traders should choose the swing high and swing low as reference points. Most trading platforms have Fibonacci retracement tools that automatically generate key levels such as 38.2%, 50%, 61.8%, and 78.6%. These levels act as potential support in uptrends and resistance in downtrends, helping traders anticipate price reactions.

Shallow retracements, such as the 38.2% retracement, suggest strong momentum while deeper retracements, like the 78.6% retracement, may indicate potential trend reversals in volatile markets.

Applications in Trading

In trading, the Fibonacci retracement levels are used to pick out entry points, especially if not wholly for price pullbacks in a trending market. The 38.2%, 50%, and 61.8% levels are the most commonly watched zones for potential reversals. In an uptrend, traders look for price pullbacks as well as bullish confirmation like candlestick patterns or relative strength index indicators for oversold conditions and enter long conditions.

In a downtrend, traders wait for a throwback (opposite of a pullback) toward a Fibonacci resistance level and confirm bearish momentum before entering short trades.

To manage risk, traders place stop-loss orders just beyond the next Fibonacci level to prevent getting stopped out because of normal price fluctuations while protecting themselves against unexpected trend reversals.

For profit target levels, Fibonacci extensions are used. These are profit targets projected after the security resumes the overall trend. Key extension levels include 100% 161.8% and 261.8%.

Example

The image above illustrates S&P 500 e-mini futures traded during a one-hour time frame in January 2025. Based on the chart, the pivot high has been observed to be 6,162.25, and the pivot low is set at 5,809. If the security were to decline toward 5,809, it would be a 100% retracement.

Retracement levels are calculated as follows:

• Retracement Level - Pivot High - (Retracement Percentage × Price Range)

with

• Price Range = Pivot High - Pivot Low

For example, the 61.8% retracement level in this case would be as follows:

Price Range = 6,162.25 - 5,809 = 353.25

• 61.8% retracement level = 6,162.25 - (0.618 × 353.25) = 6,162.25 - 218.30 = 5,944.00

In this situation, a trader bullish on S&P 500 e-mini futures is looking for an appropriate entry price. The trader sets the pivot high and pivot low as described above on the charting platform and awaits some retracement on the security.

The security does pull back, retracing to a point between the 50% and 61.8% levels. The trader then enters a long position, with a stop-loss order a little below the 61.8% retracement level and a target of the previous pivot high.

After some time, a check reveals the position remains positive and hasn't returned to the previous pivot high. The trader exits with a small profit.

Using With Other Technical Analysis Tools

In many cases, using Fibonacci retracement levels is better done with other technical analysis tools and strategies, such as Gartley patterns and Elliot Wave theory.

The Gartley pattern, a type of harmonic pattern, uses Fibonacci levels to structure its four-leg price formation: X-A, A-B, B-C, and C-D. The D-point is at the 78.6% retracement level l acting as an entry point. Traders confirm alignment with Fibonacci levels before entering a trade, placing stop-losses beyond the X-point and targeting Fibonacci extension levels for profit-taking.

Elliot Wave theory uses Fibonacci levels to forecast market cycles and pinpoint impulse and corrective waves. Traders use Fibonacci retracements to help spot pullback zones in Wave 2 and Wave 4, while Fibonacci extensions help project price targets for Wave 3 and Wave C.

By integrating Fibonacci levels with Elliot Wave theory and Gartley patterns, trend lines, and momentum indicators such as the Moving Average Convergence Divergence (MACD), and the Relative Strength Index (RSI), traders can achieve a more structured, rule-based approach to market analysis and trading.

Limitations and Further Considerations

While Fibonacci retracement levels are a popular tool, they are not foolproof and have limits. Arguably the biggest challenge is the subjectivity in selecting swing points, as different traders choose different high and low points, leading to conflicting retracement levels.

In addition, Fibonacci retracement prediction levels are low. Prices can break through levels instead of reversing as expected. Also, their effectiveness depends on market conditions as they work best in trending markets and are more unreliable in choppy environments.

Moreover, there is the potential for false signals and breakouts where the price briefly respects a Fibonacci level before continuing in the opposite direction. This can lead to premature stop-loss triggers and poor trade execution. If multiple retracement levels are clustered closely together, prices may react unpredictably, causing confusion.

There is also confirmation bias involved, which occurs when traders force the Fibonacci levels onto their charts, only seeing what supports their idea.

Common Criticisms

Many argue that Fibonacci retracement levels create ambiguity, making it difficult to determine which will hold true: support or resistance. Others point out the lack of scientific backing, as Fibonacci's natural patterns don't necessarily dictate financial market behavior.

The most common criticism relates to the tool's subjectivity. Since traders select different swing points, this can lead to inconsistent results and false signals or breakouts when the price doesn't respect these levels.

In addition, others argue that Fibonacci levels work primarily as part of a self-fulfilling prophecy because many traders use it, thereby influencing market reactions.

Limits of Using Fibonacci Retracement Levels

While the retracement levels indicate where the price might find support or resistance, there are no assurances that the price will actually stop there. This is why learning to use other confirmation signals derived from price action is necessary.

Another issue is that there are several Fibonacci retracement levels, so the price is likely to reverse near one of them quite often. The problem is that traders struggle to know which one will be useful at any particular time. When a particular one doesn’t work out, it can always be claimed that the trader should have been looking at another Fibonacci retracement level instead.

The Bottom Line

Overall, Fibonacci retracement levels are most effective when used alongside other technical indicators and market analysis, rather than as a stand-alone strategy. While they provide a structured approach to identifying support and resistance levels, traders should remain flexible, confirm signals, and be mindful of their limitations, including the potential for false signals.