After a strong move, price rarely continues in a straight line. It pulls back, then resumes. Fibonacci retracements give you a consistent set of levels for where that pullback might end, and Fibonacci extensions suggest where the next leg might go.
Where the numbers come from
The ratios come from the Fibonacci sequence (0, 1, 1, 2, 3, 5, 8, 13, 21…), where each number is the sum of the two before it. Divide a number by the next one and you approach 0.618; divide by the number two places on and you approach 0.382. Traders also use 0.236, 0.786 and 0.5. The 50% level isn't a Fibonacci ratio, but it's watched so widely that it's always included.
Drawing a retracement
In an uptrend, draw from the swing low to the swing high. In a downtrend, draw from the swing high to the swing low. The tool then marks the retracement levels between the two points.
Worked example
EUR/USD rallies from 1.0800 to 1.0900. The swing is 100 pips.
38.2% retracement = 1.0900 − 0.382 × 0.0100 = 1.0862
50% retracement = 1.0900 − 0.5 × 0.0100 = 1.0850
61.8% retracement = 1.0900 − 0.618 × 0.0100 = 1.0838
161.8% extension, measured from the swing low = 1.0800 + 1.618 × 0.0100 = 1.0962
| Level | Typical reading |
|---|---|
| 23.6% | Shallow pullback: a very strong trend |
| 38.2% | Normal pullback in a strong trend |
| 50% | Halfway: the line between premium and discount (Module 5) |
| 61.8% – 78.6% | Deep pullback; still valid if it holds. ICT's optimal trade entry sits here (Module 6) |
| 127.2% / 161.8% | Common extension targets for the next leg |
Confluence is the point
A Fibonacci level alone is just a line. It becomes interesting when it lines up with something else: a support or resistance zone, a trendline, a moving average, or a round number. Several reasons pointing to one area is called confluence, and it's where the best trade locations come from.
Key takeaways
- Fibonacci retracements mark likely pullback levels: 23.6%, 38.2%, 50%, 61.8% and 78.6%.
- Draw from swing low to swing high in an uptrend, and from swing high to swing low in a downtrend.
- Extensions such as 127.2% and 161.8% suggest targets for the next leg.
- Fibonacci levels matter most where they line up with other levels: confluence.