Fibonacci Retracements

Fibonacci Retracements are one of the most powerful tools for identifying support, resistance, and reversal zones based on natural ratios found in mathematics, art, nature — and the markets.

 

These levels help traders determine where price is likely to pull back, stall, or reverse, making them ideal for timing entries, exits, and risk management.

 

What Are Fibonacci Numbers?

The Fibonacci sequence begins with 1, and each new number is formed by adding the two previous numbers:

1, 1, 2, 3, 5, 8, 13, 21…

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When dividing one number in the sequence by the next, or by numbers two or three steps away, we get predictable ratios — the most important being 0.618, known as the Golden Ratio.

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This ratio appears everywhere:

• Nature

• Spiral galaxies

• Architecture

• Human psychology

• Market behavior

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Because markets are driven by human emotion, Fibonacci ratios often align with areas where fear and greed cause price to react.

 

Key Fibonacci Retracement Levels

The most important Fib levels for traders are:

• 0.382

• 0.500

• 0.618

• 0.786

• 0.886

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Fib extension levels (used for targets) include:

• 1.27

• 1.414

• 1.618

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These levels identify likely turning points.

 

Why 0.382 and 0.618 Matter Most

According to market theory, these levels reflect predictable zones where traders make emotional decisions:

• Pullback to 0.618 in an uptrend → strong bounce

• Bounce to 0.618 in a downtrend → strong rejection

These levels often catch major reversals with uncanny accuracy.

 

How to Draw Fibonacci Retracement Lines

The accuracy of Fib levels comes from drawing them correctly.Basic method:

1. Identify a clear high and clear low

2. Draw Fib retracement lines from high → low (or low → high)

3. Let the levels populate automatically

4. Observe price behavior at each retracement zone

The key is choosing distinct highs and lows.
Longer timeframes produce stronger levels but wider ranges—similar to how longer EMAs create smoother signals.

 

Fibonacci Example: Using AAPL (Apple)

In the example from Apple (AAPL):

• Low: 89

• High: 100.73

• Timeframe displayed: Nearly two months

 

Plotting the Fib from high → low and from low → high created overlapping Fib levels.

 

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Why Overlapped Fibs Are Powerful

When Fib levels from both directions overlap, they form:

“Key Overlapped Fib Support/Resistance”

These zones frequently produce:

• Major reversals

• Strong breakouts

• Powerful reactions

In AAPL’s example, the 0.618 and 0.382 overlapped, forming the 96.25 level — an extremely important turning point.

 

How Price Reacts to Fib Levels

The AAPL chart includes multiple reactions:

• Rejection at 98.22 → fall to overlapping 96.25 Fib

• Bounce from 96.25 → rally to 97.70

• Breakdown through 96.25 → selloff toward 94.87

• Reversal at 94.87 → rally through 96.25

• Rejection at 93.48 → decline to 91.51 (0.786 level)

• Cup-and-handle breakout → push back to 96.25 Fib cluster

This shows how Fib levels act as predictive turning points, not random lines.

 

How to Use Fibonacci Retracements Effectively

Combine Fibs with Other Indicators

 

Fibs are strongest when paired with:

• Moving averages (9, 20, 50, 200 EMA)

• Momentum indicators (MACD, RSI, Stochastics)

• Trendlines

• Support & resistance zones

The more tools align at a Fib level, the higher the probability.

 

Expect Overshoots

Price may “overrun” Fib levels by ~20 cents (or a proportional amount).
This is normal and not a break unless price closes beyond the level.

 

Don’t Redraw Constantly

Only redraw Fibs when:

• The high is broken

• The low is broken

Otherwise, Fib levels remain static — unlike moving averages.

 

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Timeframe Considerations

• Weekly Fib levels can remain valid for months — even a year

• 60-minute or 15-minute Fib sets work well for intraday traders

• Too many Fib sets overwhelm the chart

• A good balance:

  • 1 set of weekly Fibs

  • 1–2 sets of intraday Fibs

This gives broad and local context without clutter.

 

Key Takeaways

• Fibonacci levels reflect human emotion and natural ratios

• 0.382 and 0.618 are the strongest inflection points

• Overlapping Fib levels create extremely strong zones

• Fibs identify support, resistance, entries, exits, and trends

• Should be combined with EMAs or momentum indicators

• Static levels → only redraw when highs/lows break

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Pro Tips

• The 0.618 retracement is the strongest level for catching reversals.

• Overlapping Fib levels (cluster zones) are extremely powerful turning points.

• Combine Fibs with trendlines or EMAs to filter out bad setups.

• Use extensions (1.27 and 1.618) as profit targets in strong trends.

• Fib levels work best on clear, distinct highs and lows—don’t force them.

• Charts with confluence at a Fib level (EMA, trendline, volume shelf) create the best trades.