Level 4 · Lesson 12 of 16 · 7 min read
Fibonacci Retracements
A math quirk from the 13th century that the market keeps respecting.
Researched and written by Laurent What is Fibonacci Retracement?
Leonardo Fibonacci (13th century) discovered a number sequence where each number is the sum of the two before it: 1, 1, 2, 3, 5, 8, 13, 21, 34... The ratios between these numbers (0.618, 0.382, 0.236) appear throughout nature, architecture, and apparently, financial markets.
Whether it works because of math, nature, or because millions of traders use the same tool (self-fulfilling prophecy), these levels consistently act as support and resistance during pullbacks.
How to Draw Fibonacci Retracements
In MT4/MT5: Insert > Fibonacci > Retracement (or click the Fib tool in the toolbar).
- Click the start of the move (the swing low in an uptrend, or swing high in a downtrend).
- Drag to the end of the move (the swing high in an uptrend, or swing low in a downtrend).
- The levels appear automatically.
The Most Important Levels
61.8%
The "Golden Ratio." The most significant level. Deep pullbacks that hold here signal a very strong trend resumption.
38.2%
Strong trends often only retrace to this shallow level. A quick bounce here confirms very strong momentum.
50%
Not technically a Fibonacci ratio but widely observed. Round number psychology adds to its significance.
78.6%
Very deep retracement. Still valid but signals the original move may be running out of steam.
Confluence is everything. A 61.8% retracement level sitting exactly on a daily support, near a round number (1.0850), where a hammer candle just formed: that is a high-quality setup. One signal alone is weak. Three aligning signals = strong trade candidate.
Key Takeaways
- • The key Fibonacci levels are 23.6%, 38.2%, 50%, 61.8%, and 78.6% of the prior move.
- • The 61.8% level (the "Golden Ratio") is the most significant.
- • Fibonacci is used to find likely pullback levels in a trend.
- • Confluence: Fibonacci levels that align with S/R, trend lines, or candle patterns are strongest.