Module 3 · Lesson 10 of 13 · Reading price · About 5 minutes
Fibonacci Retracements and Extensions: What the Ratios Measure
On this page
Before you read: Breakouts, False Breakouts and Retests in Price Action
What you will learn
- How a Fibonacci retracement is drawn and which ratios charting tools show.
- What a Fibonacci extension measures.
- Why these levels are popular, and why that popularity is not evidence that they work.
Where do the ratios come from?
Why would a sequence of numbers from medieval mathematics appear on a price chart?
The Fibonacci sequence starts 0, 1, 1, 2, 3, 5, 8, 13, 21, and each number is the sum of the two before it. Divide a number by the next one and the result approaches about 0.618. Divide by the number two places ahead and it approaches about 0.382. These ratios, along with 0.236, 0.5 and 0.786, are levels charting tools commonly show, and tools such as TradingView let you edit the list.
The 0.5 level is not a Fibonacci ratio at all. It is included because many traders watch the halfway point of a move. That detail is a reminder that these levels are a convention, not a law of nature.
How is a retracement drawn?
If price moves from A to B and then pulls back, how do you measure how far it came back?
A retracement tool needs two points: the start and end of a move, usually a swing low and a swing high. The tool then marks levels at set fractions of the distance back toward the start.
Example with round numbers. A fictional stock rises from $50 to $70, a move of $20. The retracement levels are:
| Level | Arithmetic | Price |
|---|---|---|
| 23.6% | 70 − 0.236 × 20 | $65.28 |
| 38.2% | 70 − 0.382 × 20 | $62.36 |
| 50% | 70 − 0.5 × 20 | $60.00 |
| 61.8% | 70 − 0.618 × 20 | $57.64 |
| 78.6% | 70 − 0.786 × 20 | $54.28 |
The levels are only as meaningful as the two points chosen. Move the swing low or the swing high and every level moves with it. Wicks or closes, and which swing counts as the start, are judgment calls.
Retracement diagram
Illustrative diagram constructed for teaching. Not real market data.
The diagram shows a fictional move from $50 to $70 and the five retracement levels from the table, with the pullback ending between two of them. It is constructed for teaching and is not real market data.
Try it on a chart
- Pick the Fib retracement tool on the left and draw it from a swing low to a swing high.
- Read the level labels the tool draws between those two points.
Charts and quotes are TradingView's data, not ours, and may be delayed.
What is an extension?
If price goes beyond the old high, how could you describe how far it has gone?
An extension projects levels beyond the end of the move, using ratios such as 1.272, 1.618 and 2.618 of the original distance. In the example above, a 1.618 extension measured from the $50 start would sit at 50 + 1.618 × 20, or about $82.36. Some tools use three points instead, measuring the first move and projecting it from the end of the pullback.
Why do traders watch these levels?
If many people mark the same price, does that change what happens there?
Some practitioners propose shared attention or order clustering as an explanation for watching common ratios. This lesson does not measure who watches them or where orders rest; these are hypotheses, not evidence supplied by the ruler itself. Independently of that explanation, the fractions provide a consistent description of pullback depth for a journal. With several lines and adjustable anchors, selecting only memorable near-touches can bias an impression; nearness alone is not a test of predictive ability.
What this does not tell you about Fibonacci levels
- This lesson supplies no reproducible study establishing predictive power for a special ratio. That limited scope does not show that every study has found no effect, or that no effect exists. The calculated levels are references, not forecasts.
- The same chart gives different levels depending on which swing points you pick.
- With many levels on a chart, nearness to one of them is not evidence of anything.
- Nothing here suggests trading at any level.
Method in Practice: levels as reference points, not triggers
Fictional example. John, Harbor Index futures, the prices, times, costs and results are all invented for teaching. This shows how a written plan can be built and tested. It is not a recommendation, and nothing here says how often this idea works.
Try it on a real chart. Look at the chart in this lesson, then test this idea yourself on past sessions with bar replay. Keep your own count, including the days with no trade.
The idea. The lesson supplies no study showing special predictive power for any ratio, and different swing choices give different levels. John never enters at a Fibonacci level. He has a separate entry rule, and uses the 38.2% and 61.8% retracement levels only as places to take profit.
John's plan
- Setup
- a fall from 102.00 to 100.00 (swing points defined in the plan). Retracement levels: 38.2% = 100.75, 61.8% = 101.25 (rounded to the nearest tick)
- Enter if
- after the 100.00 low, two 30-minute periods in a row close above 100.25. Buy.
- Wrong if
- a 30-minute period closes below 99.95
- Manage
- take half at 100.75, the rest at 101.25 or by 14:30
- Risk
- $150 maximum, costs included
Three outcomes
-
Worked: the bounce reached both reference points → +$110
-
Failed: two closes above, then a new low → −$116, inside the limit
-
No trade: price reached 61.8% the same day, but John's entry rule never fired → $0
Show the full replays
| Item | Plan |
|---|---|
| Swing | High 102.00 to low 100.00 (the session's highest high and the lowest low after it) |
| Levels | 100.00 + 0.382 × 2.00 = 100.764 → 100.75. 100.00 + 0.618 × 2.00 = 101.236 → 101.25 |
| Entry condition | Two 30-minute closes in a row above 100.25. Buy 2 at market after the second |
| Wrong if | A 30-minute period closes below 99.95. Exit at market after that close |
| Management | Half at 100.75 (limit), exit for the rest to entry (stop), rest at 101.25 (limit). Time limit 14:30 CT |
| Risk cap and size | $150. Exiting just under 99.95 is planned to cost about $55 per contract, so 2 contracts |
Replay A: worked
| Time (CT) | What happened | John |
|---|---|---|
| 09:30–10:30 | Closes 100.30, then 100.35 | Two in a row: buys 2 at market, filled 100.40 |
| 10:30–11:40 | Trades 100.75 | Sells 1 (limit). Exit for the other moves to 100.40 |
| 11:40–13:30 | Never back to 100.40, trades 101.25 | Sells the last 1 (limit) |
Result after costs: +0.35 point = +$35, +0.85 point = +$85, commissions −$10. Net +$110.
Replay B: failed
| Time (CT) | What happened | John |
|---|---|---|
| 09:30–10:30 | Closes 100.28, then 100.33 | Buys 2 at market, filled 100.38 |
| 10:30–11:00 | Closes 99.90, a new low | Wrong-if met: sells 2 at market, filled 99.85 |
Result after costs: 2 × −0.53 point = −$106, commissions −$10. Net −$116.
Replay C: no trade
| Time (CT) | What happened | John |
|---|---|---|
| 09:00–09:30 | Jumps from 100.05 to close 100.90 in one period | One close above 100.25 |
| 09:30–10:00 | Closes 100.20 | Not two in a row |
| 10:00–12:00 | Rises to 101.24, then turns down | No second close in a row above 100.25 that John could act on before the cutoff. No trade |
Result: $0. Journal: "Price turned within a tick of 61.8%. That's easy to notice afterwards. My plan had no way to use it, and it shouldn't."
Test it yourself
- Write how you pick the swing points before drawing the levels.
- Compare your Fibonacci targets with targets at plain round fractions (one third, two thirds). Same costs, same entries.
- Count how often price came near any of your levels. With many levels, nearness means little.
Where it breaks
- Different swing choices give different levels.
- With several levels on a chart, price is usually near one.
- Price touching a level afterwards is easy to notice and hard to use (the no-trade replay).
Calculators: position sizerisk/rewardexpectancy
Reflection question: In your plan, is any level used as a reason to enter, or only as a reference?
Check yourself
- A fictional move runs from $100 to $140. Where is the 50% retracement? Hint: halfway back.
- Which commonly shown level is not a Fibonacci ratio? Hint: it is the halfway point.
- Why does the choice of swing points matter so much? Hint: every level is a fraction of the distance between them.
- Does the correct 57.64 retracement calculation prove either predictive power or universal absence of an effect?
Reflect on your own process
- Which swing points does your written rule say to anchor a retracement on, wicks or closes?
- When you journal a pullback, do you record the depth as a fraction before checking which ratio it was near?
- How would you count near-misses as well as near-touches if you reviewed Fibonacci levels on past charts?
- In your plan, is any level used as a reason to enter, or only as a reference?