Fibonacci Retracements

Fibonacci retracements are horizontal levels drawn between a swing low and a swing high (or the reverse) at fixed percentages of the move. Traders watch them as possible support during a pullback in an uptrend, or resistance during a bounce in a downtrend. The percentages come from ratios in the Fibonacci sequence (1, 1, 2, 3, 5, 8, 13, 21, …), named after the 13th-century mathematician Leonardo of Pisa.

The levels

For an advance from a low L to a high H, the 61.8% retracement level is H − 0.618 × (H − L). Extensions such as 161.8% project targets beyond the high once the trend resumes.

How traders use them

• Pullback entries. In an uptrend, shallow pullbacks often stop near 38.2%, deeper ones near 50% to 61.8%. Traders look for a bullish candle or an indicator turn at the level before buying.
• Trend health. A pullback that holds 38.2% suggests a strong trend. A break of 78.6% suggests the whole move may be reversing.
• Confluence. A Fibonacci level is far more useful when something else marks the same price: a previous high or low, a moving average, a trend line or a Bollinger Band.
• Targets. In a bounce within a downtrend, the same levels mark where the bounce may stall.

The weak point: choosing the swing

The levels depend entirely on which low and high you pick, and two traders often pick different ones. Use clear, significant swings that are visible on the chart without zooming in, and stick to the same timeframe you trade. MarketInOut recognizes trends automatically and draws the levels from the most recent ones, which removes that choice from screening.

For a worked example of combining Fibonacci levels with Bollinger Bands and earlier peaks, see Bollinger Bands, Local Peaks and Fibonacci Levels.

Live chart: SPY (S&P 500 ETF), daily, with automatic Fibonacci retracements. The chart updates every trading day.

Screen for it on MarketInOut

Our formula language has events for price touching or bouncing off each level (for example fibo_bu62, a bounce up from 61.8%) and functions that return the levels themselves (fibo62s(1) is the 61.8% retracement of the most recent uptrend). Stocks above their 200-day average that just bounced up from the 61.8% level:

exch(nyse,nasdaq) and type(stock) and price > 1 and advol(21) > 1
and price > sma(200) and fibo_bu62

Stocks testing the 61.8% retracement of their latest uptrend as support:

exch(nyse,nasdaq) and type(stock) and price > 1 and advol(21) > 1
and price tocha fibo62s(1)

Related: Moving averages, Bollinger Bands, Candlestick patterns.