A Fibonacci retracement measures how far price pulls back against a move. You anchor the tool to a clear swing and it divides that range into horizontal levels at 23.6%, 38.2%, 50%, 61.8% and 78.6%. Those levels become candidate areas where the pullback could end and the original trend resume.
How to draw it correctly
In an uptrend, drag the tool from the swing low to the swing high: 0% sits at the high and 100% at the low, so the retracement levels fall in between as price pulls back. In a downtrend you reverse it, dragging from the swing high down to the swing low. The single most common mistake is anchoring to the wrong swings — pick obvious, clean swings, not minor wiggles.
Reading the levels
Shallow retracements to 23.6% or 38.2% suggest a strong, eager trend that barely pauses. Deeper pulls to 61.8% or 78.6% mean the counter-move is more serious, offering better entry prices but also a higher chance the trend is failing. The 50% level often acts as a psychological line in the middle.
- Anchor to clear, significant swings — not noise.
- Uptrend: low to high. Downtrend: high to low.
- The 38.2%–61.8% band is where most tradeable pullbacks stall.
- A close well beyond 78.6% warns the move may be reversing, not retracing.
Draw retracements swing-to-swing on obvious highs and lows — the 38.2% to 61.8% zone is where most pullbacks find their footing.