Use the golden ratio to locate high-probability support, resistance, and profit targets.
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Overview
Fibonacci analysis in trading derives from the mathematical sequence discovered by Leonardo Fibonacci in the 13th century. The key ratios — 23.6%, 38.2%, 50%, 61.8% (the "golden ratio"), and 78.6% — represent proportional relationships that appear repeatedly in natural and financial systems. The 61.8% level, derived from dividing a Fibonacci number by the next, is considered the most significant.
In trading, Fibonacci Retracement levels are drawn between two significant swing points (a major high and low). The resulting levels identify potential support during pullbacks in an uptrend, or resistance during rallies in a downtrend. The 38.2%–61.8% zone is considered the "golden zone" where the highest probability retracement entries occur.
Fibonacci Extension levels project price targets beyond the original move, calculated from the swing high, swing low, and retracement point. The 161.8%, 261.8%, and 423.6% extensions provide profit targets for breakout trades. When Fibonacci levels confluence with other technical factors — round numbers, moving averages, previous swing highs/lows — their significance is greatly amplified.
Smart Money Concepts heavily incorporate Fibonacci, using the 0.79 and 0.886 levels as "optimal trade entry" zones within the golden zone. The 0.5 level, while not a true Fibonacci ratio, is included by convention because many traders reference it.
Strategy Code
This is a TradingView Pine Script example for this indicator. Paste it into the TradingView Pine Editor, add it to your chart, and adjust inputs for your market and timeframe.
//@version=6
strategy("Fibonacci Retracement & Extensions", overlay=true)
lookback = input.int(100, "Swing Lookback")
hi = ta.highest(high, lookback)
lo = ta.lowest(low, lookback)This is a thinkorswim ThinkScript example for this indicator. Open thinkorswim, create a custom study, paste the script, and apply it to your chart.
input lookback = 100;
def hi = Highest(high, lookback);
def lo = Lowest(low, lookback);
def range = hi - lo;
def fib50 = hi - range * 0.5;Join thousands of traders who use auto-Trading to execute this strategy automatically, 24/7.
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