Fibonacci Retracement
In simple terms
A tool traders use to predict where a cryptocurrency's price might bounce back or stop. It's like marking certain price levels on a chart based on a mathematical pattern found in nature, helping traders guess where to buy or sell.
Definition
Horizontal lines indicating potential support/resistance levels based on Fibonacci ratios.
In depth
A technical analysis tool that applies Fibonacci ratios (0.236, 0.382, 0.5, 0.618, 0.786) to identify potential support and resistance levels during price corrections. Traders plot these horizontal lines between a significant high and low point on a price chart; the theory suggests price momentum often reverses at these Fibonacci-derived levels because they represent areas where aggregate trader behavior and market psychology cluster around mathematically significant proportions of prior moves.
How does Fibonacci Retracement work?
You select a swing low and a swing high on a chart. The tool measures the vertical distance between them and draws horizontal lines where price would have given back 23.6%, 38.2%, 50%, 61.8% and 78.6% of that move. Most of those percentages derive from ratios in the Fibonacci number sequence; 50% is included by convention and is not a Fibonacci ratio at all. Nothing in market structure produces these lines — they are arithmetic applied to two points a person chose, so different swing selections produce entirely different levels.
An example
On an illustrative chart, price rises from a swing low of $20 to a swing high of $60, a $40 move. The tool subtracts percentages of $40 from $60: the 23.6% level lands at $50.56, the 38.2% level at $44.72, the 50% level at $40.00, and the 61.8% level at $35.28. Choose a different swing low, say $28, and every one of those levels shifts.
Figures are illustrative only.
What beginners get wrong
- Swing points get chosen after the fact so the levels appear to line up with what already happened; pick them before, not after.
- There is no market mechanism behind 61.8%; the levels matter only insofar as many participants happen to be watching the same ones.
- Stacking retracements, extensions and fans on one chart guarantees some line is always near price, which demonstrates nothing about the tool.
- A retracement reaching 61.8% does not make a bounce due — price frequently passes straight through every level in the set.
Related terms
Part of
What is technical analysis, and how are crypto charts read? — the subject page for technical analysis, with all 29 of its definitions in one place.
Educational only — not financial advice.