A Fibonacci retracement is when a stock retraces 23.6%, 38.2%, 50%, or 61.8%. Fibonacci retracements use horizontal lines to indicate areas of support or resistance at the key Fibonacci levels. It is sometimes said that when a stock retraces more than 61.8%, the move should be considered a trend change. In any event, these retracement levels can be combined with other indicators and price patterns to create an overall strategy.
In finance, Fibonacci retracement is a method of technical analysis for determining support and resistance levels. They are named after their use of the Fibonacci sequence. Fibonacci retracement is based on the idea that markets will retrace a predictable portion of a move, after which they will continue to move in the original direction.
The appearance of retracement can be ascribed to ordinary price volatility as described by Burton Malkiel, a Princeton economist in his book A Random Walk Down Wall Street, who found no reliable predictions in technical analysis methods taken as a whole. Malkiel argues that asset prices typically exhibit signs of random walk and that one cannot consistently outperform market averages. Fibonacci retracement is created by taking two extreme points on a chart and dividing the vertical distance by the key Fibonacci ratios. 0.0% is considered to be the start of the retracement, while 100.0% is a complete reversal to the original part of the move. Once these levels are identified, horizontal lines are drawn and used to identify possible support and resistance levels.