Fibonacci retracements mark the levels to which a move tends to pull back before continuing. After a strong swing, price rarely goes straight on — it retraces part of the move first. The Fibonacci ratios (derived from the famous number sequence) give a set of percentages where those pullbacks often stall: 23.6%, 38.2%, 50%, 61.8%, and 78.6%.
How to draw them
You anchor the tool on a clear swing: low-to-high in an uptrend (or high-to-low in a downtrend). The tool then draws horizontal levels at each ratio between the two. In an uptrend, these become potential support zones where buyers may step back in; the 38.2%–61.8% region is the most-watched 'buy the dip' area.
Why they 'work'
There is debate about whether Fibonacci levels have any special mathematical power, but they undeniably work as a self-fulfilling prophecy: enough traders place orders at 0.618 and 0.5 that those levels attract real buying and selling. Like all of technical analysis, the level matters because everyone is watching it — not because of mysticism.
Using them properly
A Fib level alone is a weak signal — price 'reacts' near these levels often enough to notice but not reliably enough to trade blindly. Their real power is as one ingredient in confluence (later this module): a Fib level that lines up with prior support, a moving average, or a structure point is far stronger than a Fib level floating alone. The 50% level, notably, is not a true Fibonacci ratio but is included because price respects the halfway point of a move.