A Fibonacci retracement is a key technical analysis tool, used to gain insight into when to place and close trades, or place stops and limits.
Like other Fibonacci analysis tools, Fibonacci retracements rely on the mathematical principle of the golden ratio. They are used to find areas of support and resistance in major asset moves (the point at which a move is halted, before it continues past).
To calculate Fibonacci retracement levels, technical traders draw six lines across an asset’s price chart: one at its highest point (known as 100%), one at its lowest point (0%), one at its midpoint (50%), and then three at 61.8%, 38.2% and 23.6% respectively. According to the golden ratio, these should be points at which significant levels of support and resistance are met.