Discover how to apply Fibonacci retracements in your technical analysis

Technical analysis relies on recognizing price patterns to provide structure, direction, and clear rules for traders. From spotting trade setups to setting targets and stop-loss levels, technical tools help make sense of market movements.

Unlike indicators such as the Relative Strength Index (RSI) or MACD, Fibonacci ratios are drawn directly from price action, making them ideal for traders who prefer a cleaner, less cluttered chart.

Fibonacci retracements are used to see potential zones of interest for correction within trends and work on every timeframe. To place a Fibonacci retracement, you will need to identify a high and a low using candlesticks.

Assuming an upmove in the markets, you would place the first level – the 0 line – at the swing low (trough of the move) and the second level – the 1 line – at the swing high (peak of the move).

The tool will then draw several other levels, based on Fibonacci ratios. These ratios find their basis in the Fibonacci sequence, where each number is the sum of the two that precede it, and Fibonacci ratios are acquired by dividing these exact numbers.

Using these numbers, one obtains Fibonacci ratios by dividing a number by the preceding number in the sequence — for example, 21/34 = 0.61764. The longer you go along the Fibonacci Sequence, the closer this result yields to 0.618, the Golden Ratio.

This ratio is found in many surprising ways, including the number of petals in a flower, the size of human hands relative to arms, and even the formation of DNA¹. Eventually, the same harmonic ratios found their way into trading.

Traders get other ratios like the 38.2% by dividing any number in the sequence by the number that precedes it by two places - for example, 13/34 = 0.38235. Most used ratios using similar techniques are 23.6%, 38.2%, 50%, 61.8%, and 100%. Other less commonly used ratios are 11.6% and 78.6%.

The idea is that prices may retrace from their highs (using the same low to high example) and the retracement will stop at one of these ratios. The converging number of orders at the same Fibonacci ratio will magnify the reaction to the level.

Traders use this tool to determine where they will join the ongoing trade in a continuation trade. Important thing to note is that although Fibonacci retracements provide a potential level of continuation, prices may still continue to retrace further.

Using the most recent impulsive move in NZD/USD after a strong downtrend, placing a Fibonacci retracement from the beginning to the peak of the impulsive move higher gave a precise entry for traders who were looking to enter the move on a retracement.

Using the exact same tool, it is possible to plan for potential resistance and support in prices that haven’t been traded yet.

This helps traders to take profits and/or place different entries – as many algorithms and traders are looking at similar tools for their profit-taking.

To get these Fibonacci projection levels, use the exact same process as the initial Fibonacci retracement tool.

This time, we will use similar ratios, adding 100% to them. For example, Fibonacci extension levels will include 123.6%, 138.2%, 161.8%, etc.

It is to the trader’s discretion to see which extension they will choose to place their profit or entry orders.
One way to decide is to observe how strong the preceding move has been, and it depends on one’s appetite for risk. As a rule of thumb, the 161.8% ratio tends to see stronger reactions than other Fibonacci extensions.

It is once again essential to note that prices may not stop where the extensions point, although this tool still provides an extra layer of planning for trades, particularly as prices enter levels that have never been traded before, such as new all-time highs.

Using the initial 2010 bottom in CHF/JPY as the basis of the Fibonacci tool placement, with the 0 level at the 2009 lows and the 1 level at the 2015 highs, using a 161.8% Fibonacci extension gave the precise level of where the 2024 rally topped.

Using May 19, 2025, highs as the base and May 21, 2025, lows, as prices slowed their descent at this time, placing a Fibonacci tool and using the 161.8% extension once again provides a level where S&P 500 prices stopped their corrective downtrend.

Traders may use this either to avoid selling lows or rejoining the uptrend, once establishing that the probabilities of a further descent are reduced.

As anything in the markets, Fibonacci extensions do not forecast if all-time highs will happen or that further lows won’t be broken, however, if new prices are discovered, these extensions provide levels where some algorithms and traders may have interest in taking profits – which eventually results in moves stalling as many orders come in at similar levels.

Footnotes:

¹ https://www.mathnasium.com/blog/golden-ratio-in-nature