Fibonacci retracement explained
Updated 11 October 2026
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Fibonacci retracement is a way of drawing horizontal lines on a chart between a swing low and a swing high. The lines sit at fixed percentages of that move: 23.6%, 38.2%, 50%, 61.8% and often 78.6%. Traders use them to mark areas where a pullback might slow down. They are a measuring tool, not a forecast.
Where the percentages come from
The Fibonacci sequence runs 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89 and so on, with each number the sum of the two before it. Divide a number by the next one and you get close to 0.618. Divide by the number two places ahead and you get about 0.382. Three places ahead gives about 0.236. The 50% level is not a Fibonacci ratio at all; it is included because traders have long watched the halfway point of a move. The 78.6% level is the square root of 0.618.
There is no proof that markets respect these ratios because of some natural law. A more honest explanation is that many people draw the same lines, so orders sometimes cluster near them. That can make a level matter for a while, and it can just as easily be ignored.
The formula
For an up move (price went from a swing low to a swing high and is now pulling back):
- Range = swing high − swing low
- Retracement level = swing high − (range × ratio)
For a down move, you flip it: level = swing low + (range × ratio). The Fibonacci retracement calculator does both directions for you.
Worked example
Say Stock ABC rose from a swing low of ₹400 to a swing high of ₹500 over a few weeks. The range is ₹500 − ₹400 = ₹100.
| Ratio | Calculation | Level |
|---|---|---|
| 23.6% | 500 − (100 × 0.236) | ₹476.40 |
| 38.2% | 500 − (100 × 0.382) | ₹461.80 |
| 50% | 500 − (100 × 0.5) | ₹450.00 |
| 61.8% | 500 − (100 × 0.618) | ₹438.20 |
| 78.6% | 500 − (100 × 0.786) | ₹421.40 |
If the stock now falls back towards ₹460, a chartist would note that it is near the 38.2% line. Nothing says it must stop there. It could bounce, pause, or slice through to ₹438 or all the way below ₹400.
Choosing the swing points
The hardest part is not the arithmetic. It is deciding which low and which high to use. Two people looking at the same chart can pick different swings and get completely different lines. A few habits help keep it consistent:
- Use clear, obvious turning points that stand out on the time frame you trade, not tiny wiggles.
- Decide whether you use candle wicks or closing prices, and stick to one.
- Redraw when a new swing high or low forms. Old lines describe an old move.
How traders use the levels
People often combine retracement lines with other things on the chart, such as a moving average, a previous support zone or a pivot point. When several tools point to a similar area, some traders treat it as a zone worth watching. Others use the levels only to plan exits: for example, placing a stop-loss a little beyond the 61.8% line, on the view that a deeper fall means the earlier move has failed.
Extensions work the other way. A 161.8% extension of the same move would be ₹400 + (₹100 × 1.618) = ₹561.80. Some traders note this as a possible area if the stock goes on to make a new high. Again, it is a line, not a target anyone can promise.
Limits you should know
- Lines are subjective. The output depends entirely on the swing you chose.
- Five levels cover a lot of ground. Between 23.6% and 78.6% you have marked more than half the move. Price will be "near a Fibonacci level" much of the time by chance.
- Hindsight looks clean. On old charts it is easy to find a level that worked and forget the ones that did not.
- They describe the past. Like every chart tool, retracement lines are drawn from prices that already happened.
Treat Fibonacci lines as a common language for describing a pullback. They help you plan where you would be wrong and how much you would lose, which you can then size with the position size calculator.
A word on risk
No chart tool changes the basic odds. SEBI's own studies (2023 and 2025) found that about 9 in 10 individual F&O traders lost money in the years studied (see SEBI). If you use retracement lines, use them to define risk first, and keep each trade small enough that being wrong is affordable.
Questions people ask
- Is 50% a Fibonacci ratio?
- No. The 50% level does not come from the Fibonacci sequence. It is included because traders have long watched the halfway point of a move.
- Should I use wicks or closing prices for the swing?
- Either can work, but be consistent. Changing between them changes every level on the chart.
- Do Fibonacci levels predict where price will reverse?
- No. They are lines drawn from past prices. Price may react near them, ignore them, or reverse somewhere else entirely.
- What is the difference between retracement and extension?
- Retracement levels sit inside the original move and mark possible pullback areas. Extension levels sit beyond the move, such as 161.8%, and mark areas past the previous high or low.