Fibonacci retracement, simply

The idea

Prices rarely move in a straight line. After a big rise, they often give back part of it before the next move. This is called a pullback or retracement.

Fibonacci retracement is a way to measure how far a pullback has gone. You pick a swing low and a swing high, and the tool draws lines at set percentages of that move.

The levels

The usual levels come from ratios in the Fibonacci number series, which is where the name comes from.

• 23.6%: a shallow pullback
• 38.2%: a moderate pullback
• 50%: half the move given back
• 61.8%: a deep pullback, linked to the golden ratio
• 78.6%: a very deep pullback

How traders use it

Traders watch these lines as places where a pullback could stop. The area between 50% and 61.8% gets the most attention and is sometimes called the golden zone.

The levels have no special power. They work partly because many people watch them. They are most useful when they line up with an old support level or a moving average.

In a downtrend

In a downtrend, draw from the swing high down to the swing low. The levels then mark how far a bounce might go before sellers return.

Choosing the swing

The result depends on which low and high you pick. Use clear turning points on the daily chart and skip small wiggles.

On NEPSE, use adjusted prices. A bonus book closure on a raw chart can create a fake swing low that throws every level off.

Extensions

Fibonacci levels can also be drawn past the swing high, for example at 141.4% and 161.8% of the move. These are called extensions. Some traders use them as possible targets if a rise carries on past the old high.

Common mistakes

Fibonacci is easy to draw and easy to misuse.

• Picking a swing that is too small.
• Drawing on raw prices across a bonus.
• Expecting price to stop exactly on a line.
• Ignoring the bigger trend.