Fibonacci retracement
Fibonacci retracement marks levels between a swing low and swing high at set fractions of the move, such as 38.2, 50 and 61.8 percent, as places where a pullback might stop.
How Fibonacci retracement is calculated
Level = swing high - (ratio x (swing high - swing low)) in an uptrend. The ratios 23.6, 38.2, 61.8 and 78.6 percent come from relationships between numbers in the Fibonacci sequence. The 50 percent level is not a Fibonacci ratio and is included by convention.
How it is read
Traders look for a pullback to hold near one of the levels. The levels move when a different swing is chosen.
Common mistakes
- Choosing the swing points after seeing where price turned.
- Treating five levels as five chances. With that many lines, price will land near one often by chance.
- Quoting the golden ratio as if it were a market law.
What Tickfloor tested
Tickfloor's research desk has backtested 678 strategies, net of modelled trading costs. After correcting for the 761 tests run, 0 passed. That does not prove no strategy works. These are historical diagnostics, not validation under Testing Standard v2: the backtest harness predates that standard and has not been re-run to meet it.
Related concepts
General information only. It doesn't consider your objectives, finances or needs. Tickfloor holds no financial services licence and never places trades.