Fibonacci Retracement and Extension

Fibonacci retracement is a tool that measures how far price might pull back within a larger trend before continuing in the original direction. It is built from ratios derived from the Fibonacci number sequence, and the ones traders watch most closely are 23.6%, 38.2%, 50%, 61.8%, and sometimes 78.6%. To use it, you draw the tool from the start of a clear swing to its end, and the software plots horizontal lines at each ratio between those two points, marking zones where the retracement might stall.

For example, if a stock rallies from 100 to 150, the 61.8% retracement level would sit around 119, meaning a pullback that reverses near there and resumes upward is treated as a healthy correction rather than a trend change. Traders often combine this level with other confirmation, such as a support zone, an order block, or a bullish candle pattern, before treating it as an entry.

Extensions work the same way but project beyond the original swing, at ratios like 127.2%, 161.8%, and 261.8%, giving traders logical places to take profit or expect the next leg of a move to stall. Because these levels are just probability zones and not guaranteed turning points, they are almost always used alongside market structure, liquidity zones, or momentum indicators covered earlier in this module rather than in isolation.

A common mistake is drawing Fibonacci levels on the wrong swing, which produces retracement zones that do not line up with anything price actually respects. Always anchor the tool to the most recent, clearly defined high and low that other traders would also plot, since the levels only matter to the extent that enough market participants are watching the same zones.