In the 13th century, Fibonacci described a sequence where each number is the sum of the two before it: 1, 1, 2, 3, 5, 8, 13, 21... The ratio between consecutive numbers converges on 0.618 — found throughout nature. Traders noticed markets seem to respect these same ratios at retracement levels. Whether this is mathematical truth or mass self-fulfilling prophecy, the levels are watched by enough participants to make them real.
After a significant move, price often "retraces" before continuing. The most common pullback depths: 23.6%, 38.2%, 50%, 61.8%, and 78.6%. The 61.8% level (the golden ratio) is the most significant — a pullback deeper than 78.6% usually means the prior trend is over.
Once a retracement level holds, extensions project where the next wave might go. Key levels: 127.2%, 161.8%, and 261.8% of the prior move. Traders often take partial profits at 127.2% and target 161.8% for full exit.
Round numbers ($100, $1,000, $50,000 for Bitcoin) attract orders simply because of human psychology. Options traders cluster strikes there. Investors set limits there. The result: price pauses, reverses, or accelerates at round numbers far more than at arbitrary nearby prices. Always note the nearest round numbers when reading a chart.
How to use Fibonacci: draw retracements from significant swing highs to lows over at least a 10–15% move. Look for confluence — a Fibonacci level coinciding with a prior S/R level, a moving average, and above-average volume is far more significant than a Fibonacci level in isolation. Treat them as zones, not precise prices.
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