Leonardo Fibonacci, an Italian mathematician, popularized the Fibonacci sequence—a series of numbers where each number equals the sum of the two preceding ones:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, etc.
The sequence’s ratios (e.g., 13/8 = 1.625) converge toward 1.618, known as the golden ratio. Traders leverage these ratios (23.6%, 38.2%, 61.8%, 161.8%) to identify support, resistance, and retracement levels in markets.
How Fibonacci Ratios Apply to Trading
- Elliott Wave Theory: Developed by Ralph Nelson Elliott, this theory uses Fibonacci ratios to predict market trends via five-wave advances and three-wave corrections.
- Retracement Levels: Temporary price reversals often stall near Fibonacci-derived support/resistance levels (e.g., 38.2%, 50%).
- Extensions: Tools like Fibonacci extensions project new support/resistance levels during breakouts.
Steps to Use Fibonacci Retracement on thinkorswim:
- Open Charts and select a ticker/timeframe.
- Right-click a price high/low → Add a drawing → Select % (Fibonacci Retracements).
- Click at the high/low point, then drag to the opposite extreme. Levels auto-calculate.
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Practical Example: S&P 500 (SPX)
An SPX chart showed:
- Resistance near 23.6% after a rally.
- Support at 38.2% during pullbacks.
- Price reversals aligning with Fibonacci levels, offering potential entry/exit points.
Fibonacci Extensions for Breakouts
Extensions (e.g., 138.2%, 161.8%) predict new support/resistance beyond historical ranges.
How to Plot Extensions on thinkorswim:
- Select Charts → Choose a ticker.
- Right-click three key price points (high, low, retracement end).
- Activate the Fibonacci extensions tool → Levels display potential future barriers.
Case Study: A stock testing 23.6% (resistance) and 38.2% (support) post-breakout, forming a new trading range.
FAQs
1. What’s the most reliable Fibonacci retracement level?
61.8% ("golden ratio") is widely watched, but combining multiple levels (e.g., 38.2% + 50%) increases accuracy.
2. Can Fibonacci tools predict exact price reversals?
No—they highlight probable zones. Confirm with volume, RSI, or moving averages.
3. Do Fibonacci levels work for day trading?
Yes, especially on 15-minute/hourly charts for intraday support/resistance.
4. How do extensions differ from retracements?
Retracements analyze pullbacks within a trend; extensions project targets beyond breakouts.
5. What are common Fibonacci trading mistakes?
- Ignoring broader market context.
- Over-relying on a single level without confirmation.
Key Takeaways
- Use retracements to spot pullback opportunities in trending markets.
- Apply extensions to identify profit targets during breakouts.
- Combine with other indicators (e.g., MACD, trendlines) for stronger signals.
👉 Enhance your strategy with Fibonacci tools
Note: Trading involves risk; past performance doesn’t guarantee future results.