A Fibonacci retracement is a charting tool that marks how far price might pull back inside a move before the trend resumes. You draw it from a swing low to a swing high (or the reverse), and it plots horizontal lines at 23.6%, 38.2%, 50%, 61.8% and 78.6% of that move. Traders watch those lines as possible places to enter with the trend.
In short
- The levels are percentages of the last swing: 23.6%, 38.2%, 50%, 61.8% and 78.6%. The 50% level is not a Fibonacci ratio, but nearly every platform includes it.
- For a buy, drag the tool from the swing low to the swing high. For a sell, drag from the swing high to the swing low.
- A retracement level is an area to watch, not a signal. There is no published evidence that price turns at these levels more often than at other depths.
- The stop usually goes just beyond the next level or the start of the swing, which fixes the distance and so the position size.
- On a $25,000 Classic account, a 38-pip stop on 0.32 lots of GBP/USD risks about $122, under 10% of the $1,250 first-day daily loss limit.
What is a Fibonacci retracement?
A Fibonacci retracement is a set of horizontal lines drawn over a price swing. Each line shows the price at which the market would have given back a set share of the swing. If GBP/USD rises 200 pips and falls back 124 pips, it has retraced 62% of the move.
The ratios come from the Fibonacci sequence, where each number is the sum of the two before it (1, 1, 2, 3, 5, 8, 13, 21 and so on). Divide a number by the next one along and the result settles near 0.618. Square 0.618 and you get 0.382. Take its square root and you get 0.786. The 23.6% level is 0.618 cubed. These are the five lines the tool draws.
The tool measures retracements, the pullbacks inside a move. A related tool, the Fibonacci extension, projects beyond the end of a swing and is used for targets. The two are used together, and this guide covers both.
Which Fibonacci retracement levels matter?
The 38.2%, 50% and 61.8% levels are the ones traders watch most. A shallow pullback to 38.2% suggests a strong trend, 50% a normal one and 61.8% a weaker one. A move past 78.6% often means the trend has failed and price is heading back to the start of the swing.
| Level | What traders read from it |
|---|---|
| 23.6% | A very shallow pullback, seen in a strong trend |
| 38.2% | The first level many traders watch for a trend entry |
| 50% | The middle of the swing, the line between premium and discount |
| 61.8% | The "golden ratio" level, a deeper pullback with a short stop |
| 78.6% | The last level before the swing is fully reversed |
No level is certain. In a strong uptrend price may never reach 38.2% before rising again, and in a weak one it can pass 78.6% and keep falling. Part of the reason traders watch the levels is that other traders do, so orders cluster there, but that effect is not constant. Your own records on your own chart will show which levels earn their place.
How do you draw a Fibonacci retracement?
Choose the swing, select the retracement tool, click its start and drag to its end. For a buy, start at the swing low and end at the swing high. For a sell, start at the swing high and end at the swing low. The levels then appear between the two points.
The choice of swing matters more than the tool. A swing is the move between two turning points, and different traders pick different ones. Some rules to keep it objective:
- Use the most recent complete swing that broke the previous high (in an uptrend) or low (in a downtrend). The break of structure guide explains how to spot it.
- Draw from wick to wick, or body to body, and pick one method. Mixing them moves the lines by several pips.
- Do not redraw the swing after price misses the zone. A swing you can change afterward always shows a good level.
- Use a higher timeframe for the trend and a lower one for the swing, such as a 4-hour trend with a 1-hour swing.
Here is a worked swing. GBP/USD rises from 1.2500 to 1.2700, 200 pips. The retracement prices for a buy are:
| Level | Pips given back | Price |
|---|---|---|
| 23.6% | 47.2 | 1.2653 |
| 38.2% | 76.4 | 1.2624 |
| 50% | 100 | 1.2600 |
| 61.8% | 123.6 | 1.2576 |
| 78.6% | 157.2 | 1.2543 |
What are Fibonacci extensions?
Fibonacci extensions are levels drawn beyond the end of a swing, at 127.2% and 161.8% of its length, that traders use as profit targets. If price retraces and then breaks the swing high, the extension shows where the next leg might stop.
On the GBP/USD swing above, the 127.2% extension sits 54.4 pips past 1.2700, at 1.2754. The 161.8% extension is 123.6 pips past, at 1.2824. Many platforms offer extensions as a separate tool that needs three clicks: the swing start, the swing end and the end of the pullback. A simpler method is to use the swing high as the first target and the 127.2% line as the second.
The same caution applies. Extensions are a way to choose a target that is not arbitrary, and they are not predictions. If the target is closer than your minimum reward, skip the trade.
How do you trade a Fibonacci retracement?
Wait for price to pull back to a level in the direction of the trend, look for a reason to enter there, and place the stop beyond the next level. The level is where you look for the trade. It is not the trade. Without confirmation, a line on a chart is just a line.
A workable sequence:
- Find the trend on a higher timeframe and decide whether you only buy or only sell.
- Draw the retracement over the latest swing in that direction.
- Pick the level or zone you will accept before price reaches it, such as 38.2% to 61.8%.
- Look for confirmation as price reaches it. Common signs are a candle that closes back in the trend's direction, a support or resistance area at the same price, or an order block or fair value gap inside the zone.
- Put the stop beyond the next level, or beyond the start of the swing for a safer one.
- Set the target at the swing high or at an extension, and skip the trade if the room is too small.
The ICT version of this idea is the 62% to 79% band, which the optimal trade entry guide covers. The price action trading guide shows how to read the confirmation candles.
What does a Fibonacci trade look like with real numbers?
This example is a buy on a 1-hour GBP/USD chart on a $25,000 Classic account risking 0.5% per trade, which is $125. One standard lot of GBP/USD is worth $10 a pip. The prices are made up for teaching.
- The 4-hour chart is rising. On the 1-hour chart the swing runs from 1.2500 to 1.2700.
- Price pulls back to 1.2576, the 61.8% level, and a 1-hour candle closes back above its open.
- Buy at 1.2576 with a stop at 1.2538, 5 pips below the 78.6% level at 1.2543. The risk is 38 pips.
- Size: $125 / (38 pips x $10) = 0.329 lots, rounded down to 0.32. A pip is $3.20, so the risk is 38 x $3.20 = $121.60.
- Set the target at the swing high, 1.2700. That is 124 pips, worth 124 x $3.20 = $396.80, a ratio of 3.3 to 1.
- The 127.2% extension at 1.2754 is a second target, 178 pips away.
If price turns at 1.2600 and never reaches your order, you miss the trade and lose nothing. If a 1-hour candle closes below 1.2500, the swing has failed and the idea is over. Simulated trades carry costs as a live account would: a commission when a trade opens and closes, and holding costs on positions kept overnight, so the real result is a little below the figures here.
How this works on CMC Funded
On a $25,000 Classic account the daily loss limit is 5% of the day's starting equity, which is $1,250 on the first day, and the maximum loss is a fixed 10%, so the floor is $22,500. The $121.60 trade above uses about 10% of the daily limit. Both limits are measured on equity, so a floating loss on an open trade counts against them before the stop is hit.
The limit ends the account when reached, so the stop's distance matters. If you move the stop from 38 pips to 76 pips to give the trade "room" and keep 0.32 lots, the risk doubles to $243.20. Deep levels such as 78.6% have short stops for that reason, and shallow ones such as 38.2% need wider stops or smaller sizes.
The Classic profit targets are 8% in Phase 1 and 5% in Phase 2, which are $2,000 and $1,250 on this account. A $396.80 win covers about 20% of the first. Holding overnight and over the weekend is allowed, with holding costs, so a swing trade can be left to play out. The position size calculator runs the lot sum for any level, and the rules give the exact definitions.
Does Fibonacci retracement work?
There is no reliable evidence that price turns at Fibonacci levels more often than at other depths, and no published win rate for the method. It is useful because it makes an entry and a stop objective, which helps with sizing and record keeping, not because the ratios predict the market.
Three things make results hard to read. The swing is a choice, so one chart supports several sets of levels. In hindsight, the pullbacks that stopped at a level stand out and the ones that ran through it are forgotten. And with several lines on the chart, price will always be near one of them, so some line will seem to have worked.
To test it, write the swing rule, the levels you will use and the stop rule. Mark 50 swings on one pair and record which level, if any, price turned at. The trading journal template guide shows what to log.
Common mistakes
- Drawing from the wrong end of the swing. For a buy, the levels must fall below the midpoint of the move. If they are above it, the drag went the wrong way.
- Redrawing after the fact. Moving the swing to fit what price did makes every level look like it worked.
- Using every level. With five lines close together, price is always at one of them. Pick your zone first.
- Treating a level as a signal. Price touching 61.8% is a place to look for confirmation, not a trade.
- Putting the stop on the level. Price often probes through a level before turning, so a stop on the line is hit more often.
- Sizing from the level and not the stop. The lot size comes from the distance to the stop, 38 pips in the example.
- Using a swing that is too small. A 15-pip swing gives levels a few pips apart, which is inside the spread on many pairs.
Questions traders ask
What is the best Fibonacci retracement level?
None has been shown to be better. The 61.8% level is the most popular, and 38.2% suits strong trends. A level that works on one pair and timeframe may not work on another, so test the ones you plan to use.
Why is 61.8% the golden ratio?
It is the ratio between consecutive Fibonacci numbers once the sequence is long. It appears in geometry and nature, and traders have borrowed it. That it appears in nature does not show that markets respect it.
Can you use Fibonacci retracement on any timeframe?
Yes. Traders use it from the 5-minute chart to the weekly. Longer swings give wider zones, which allow bigger stops and smaller position sizes for the same dollar risk.
What is the difference between retracement and extension?
A retracement measures how far price pulls back inside a swing, and is used for entries. An extension measures how far it might travel beyond the swing, and is used for targets.
Next steps
The Academy lesson on support and resistance shows how to pair a retracement level with a price area that has held before, and the indicators lesson covers tools to confirm the turn. Read the trend following guide for the trend side of the plan, and use the position size calculator for each entry. You can compare the Classic and Direct routes on the challenges page.