A Fibonacci retracement is a popular tool that traders can use to identify support and resistance levels, and place stop-loss orders or target prices.
The indicator connects any two points that are relevant, a high and low point.
The percentage levels provided are areas where the price could stall or reverse.
Levels should not be relied on exclusively. For example, it is dangerous to assume the price will reverse after hitting a specific Fibonacci level. It may, but it also may not.
Fibonacci retracement levels are most frequently used to provide potential areas of interest. If a trader wants to buy, they watch for the price to stall at a Fibonacci level and then bounce off that level before buying.
The most commonly used ratios include 23.6%, 38.2%, 50%, 61.8% and 78.6%. These represent how much of a prior move the price has corrected or retraced.