Fibonacci Levels

Price levels derived from the Fibonacci sequence and ratios (23.6%, 38.2%, 50%, 61.8%, 78.6%) used to identify potential support, resistance, and price targets.

Fibonacci analysis in trading is based on the mathematical sequence discovered by Leonardo Fibonacci, where each number is the sum of the two preceding ones (1, 1, 2, 3, 5, 8, 13, 21...). The key ratios — 61.8% (the "golden ratio"), 38.2%, and 23.6% — appear repeatedly in natural phenomena, and technical analysts have found them useful for identifying potential turning points in financial markets.

Fibonacci retracements are drawn by identifying a significant price swing (from a major low to a major high, or vice versa) and applying the Fibonacci ratios to that range. The resulting levels (23.6%, 38.2%, 50%, 61.8%, and 78.6% of the swing) are treated as potential support levels during pullbacks in uptrends and resistance levels during rallies in downtrends. The 38.2% and 61.8% levels are most widely watched.

Fibonacci extensions project where a price might move beyond the original swing high after a pullback, providing potential profit targets at levels like 127.2%, 161.8%, and 261.8% of the prior swing. The utility of Fibonacci levels is partly self-fulfilling — because so many traders watch the same levels, price does tend to react around them, creating the patterns that justify continued attention. Critics argue this is circular, but proponents note that the same criticism applies to all support and resistance analysis.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.