Fibonacci Retracement
Definition
Horizontal lines indicating potential support/resistance at key Fibonacci ratios (23.6%, 38.2%, 50%, 61.8%, 78.6%).
Detailed Explanation
Fibonacci retracements use horizontal lines to indicate where support and resistance are likely to occur. Based on the Fibonacci sequence, these levels represent percentages of a prior price move. Traders use them to identify potential reversal points during pullbacks. The 61.8% level (golden ratio) is considered most significant. Fibonacci works because many traders watch the same levels, creating self-fulfilling support/resistance.
Example
Stock rises from $100 to $200. The 61.8% retracement is at $138.20. When price pulls back to this level, traders watch for buying opportunity.