finance Finance refers to monetary resources and to the study and Academic discipline, discipline of money, currency, assets and Liability (financial accounting), liabilities. As a subject of study, is a field of Business administration, Business Admin ...

, Fibonacci retracement is a method of

technical analysis In finance, technical analysis is an analysis methodology for analysing and forecasting the direction of prices through the study of past market data, primarily price and volume. As a type of active management, it stands in contradiction to ...

for determining support and resistance levels. It is named after the

Fibonacci sequence In mathematics, the Fibonacci sequence is a Integer sequence, sequence in which each element is the sum of the two elements that precede it. Numbers that are part of the Fibonacci sequence are known as Fibonacci numbers, commonly denoted . Many w ...

of numbers, whose ratios provide price levels to which markets tend to retrace a portion of a move, before a trend continues in the original direction. A Fibonacci retracement forecast is created by taking two extreme points on a chart and dividing the vertical distance by Fibonacci ratios. 0% is considered to be the start of the retracement, while 100% is a complete reversal to the original price before the move. Horizontal lines are drawn in the chart for these price levels to provide support and resistance levels. Common levels are 23.6%, 38.2%, 50%, and 61.8%. The significance of such levels, however, could not be confirmed by examining the data. Arthur Merrill in ''Filtered Waves'' determined there is no reliably standard retracement. The appearance of retracement can be ascribed to price volatility as described by

Burton Malkiel Burton Gordon Malkiel (born August 28, 1932) is an American economist, financial executive, and writer most noted for his classic finance book ''A Random Walk Down Wall Street'' (first published 1973, in its 13th edition as of 2023). Malkiel i ...

, a

Princeton Princeton University is a private Ivy League research university in Princeton, New Jersey, United States. Founded in 1746 in Elizabeth as the College of New Jersey, Princeton is the fourth-oldest institution of higher education in the Unit ...

economist An economist is a professional and practitioner in the social sciences, social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy. Within this ...

in his book ''

A Random Walk Down Wall Street ''A Random Walk Down Wall Street'', written by Burton Gordon Malkiel, a Princeton University economist, is a book on the subject of stock markets which popularized the random walk hypothesis. Malkiel argues that asset prices typically exhibit ...

''.

Common uses

Fibonacci retracement is a popular tool that technical traders use to help identify strategic places for transactions, stop losses or target prices to help traders get in at a good price. The main idea behind the tool is the support and resistance values for a currency pair trend at which the most important breaks or bounces can appear. The retracement concept is used in many indicators such as Tirone levels, Gartley patterns, Elliott wave principle, and more. After a significant movement in price (be it up or down) the new support and resistance levels are often at these lines. Unlike

moving average In statistics, a moving average (rolling average or running average or moving mean or rolling mean) is a calculation to analyze data points by creating a series of averages of different selections of the full data set. Variations include: #Simpl ...

s, Fibonacci retracement levels are static prices. This allows quick and simple identification and allows traders and investors to react when price levels are tested. Because these levels are inflection points, traders expect some type of price action, either a break or a rejection. The 61.8% (0.618) Fibonacci retracement that is often used by

financial analyst A financial analyst is a professional undertaking financial analysis for external or internal clients as a core feature of the job. golden ratio In mathematics, two quantities are in the golden ratio if their ratio is the same as the ratio of their summation, sum to the larger of the two quantities. Expressed algebraically, for quantities and with , is in a golden ratio to if \fr ...

Criticism

Extensive backtests of Fibonacci retracement over thousands of

stock Stocks (also capital stock, or sometimes interchangeably, shares) consist of all the Share (finance), shares by which ownership of a corporation or company is divided. A single share of the stock means fractional ownership of the corporatio ...

s have shown that the retracements values of 38%, 50%, and 62% had been no likelier to appear than any other of the possible retracement values.

References

{{Technical analysis, state=collapsed Chart overlays Fibonacci numbers Technical analysis

Common uses

Criticism

See also

References