What it means
Draw from swing low to swing high in an uptrend. Levels work best when they line up with other evidence. 50% isn't a true Fibonacci ratio but is used anyway.
Example
A move from 50 to 150 has its 61.8% retracement at 150 − 61.8 = 88.2.
In practice
Retracements answer a practical question: how far might this pullback go before the trend resumes? Shallow pullbacks to around 38.2% suggest a strong trend; deeper ones towards 61.8% and 78.6% give better prices with more doubt.
Traders look for a level that lines up with structure, such as a prior high or an order block, and enter there with the stop beyond the start of the move.
What to watch for
With five levels on every swing, price will always appear to respect one of them in hindsight. The tool also depends on which swing you choose, so two traders can draw it differently on the same chart.
Related terms
3 terms- Optimal trade entryOTEICT's entry zone between the 62% and 79% retracement of a leg, with 70.5% as the sweet spot.
- PullbackA slower move against the trend between impulses; where many traders look for entries.
- Fibonacci extensionLevels beyond the old high (127.2%, 161.8%) used to estimate targets for the next leg.