In finance, Fibonacci retracement is a technical analysis tool used to identify support and resistance levels by applying ratios derived from the Fibonacci sequence. It involves selecting two extreme points on a price chart and dividing the vertical distance using key Fibonacci ratios such as 23.6%, 38.2%, 50%, and 61.8%, where 0% marks the start of the retracement and 100% the full reversal. These levels help predict potential price corrections before trends resume. However, studies like Arthur Merrill’s Filtered Waves question their reliability. Price fluctuations explained by volatility also contribute to retracement patterns, as explored by Princeton economist Burton Malkiel in A Random Walk Down Wall Street.
Common uses
Fibonacci retracement is a popular tool that technical traders use to help identify strategic places for transactions, stop losses or target prices to help traders get in at a good price. The main idea behind the tool is the support and resistance values for a currency pair trend at which the most important breaks or bounces can appear. The retracement concept is used in many indicators such as Tirone levels, Gartley patterns, Elliott wave principle, and more. After a significant movement in price (be it up or down) the new support and resistance levels are often at these lines.
Unlike moving averages, Fibonacci retracement levels are static prices. This allows quick and simple identification and allows traders and investors to react when price levels are tested. Because these levels are inflection points, traders expect some type of price action, either a break or a rejection. The 61.8% (0.618) Fibonacci retracement that is often used by financial analysts corresponds to the golden ratio.5
Criticism
Extensive backtests of Fibonacci retracement over thousands of stocks have shown that the retracements values of 38%, 50%, and 62% had been no likelier to appear than any other of the possible retracement values.6
See also
References
Aspray, Tom (August 13, 2011). "Fibonacci analysis – Master the basics". Forbes. Retrieved October 24, 2016. https://www.forbes.com/sites/tomaspray/2011/08/13/fibonacci-analysis-master-the-basics/#1da6d16b5a4d ↩
Aspray, Tom (August 13, 2011). "Fibonacci analysis – Master the basics". Forbes. Retrieved October 24, 2016. https://www.forbes.com/sites/tomaspray/2011/08/13/fibonacci-analysis-master-the-basics/#1da6d16b5a4d ↩
Kempen, René (2016). "Fibonaccis Are Human (Made)" (PDF). IFTA Journal. http://ifta.org/public/files/journal/d_ifta_journal_16.pdf ↩
Merrill, Arthur (1977). Filtered Waves: Basic Theory: a Tool for Stock Market Analysis. Analysis Press. ISBN 0911894365. 0911894365 ↩
Aspray, Tom (August 13, 2011). "Fibonacci analysis – Master the basics". Forbes. Retrieved October 24, 2016. https://www.forbes.com/sites/tomaspray/2011/08/13/fibonacci-analysis-master-the-basics/#1da6d16b5a4d ↩
Merrill, Arthur (1977). Filtered Waves: Basic Theory: a Tool for Stock Market Analysis. Analysis Press. ISBN 0911894365. 0911894365 ↩