In finance, Fibonacci retracement is a method of technical analysis for determining resistance levels. They are named after their use of the Fibonacci sequence. Fibonacci retracement is based on the idea that markets will retrace a predictable portion of a move, after which they will continue to move in the original direction.
The appearance of retracement can be ascribed to ordinary price volatility as described by Burton Malkiel, a Princeton economist in his book A Random Walk Down Wall Street, who found no reliable predictions in technical analysis methods taken as a whole. Malkiel argues that asset prices typically exhibit signs of random walk and that one cannot consistently outperform market averages. Fibonacci retracement is created by taking two extreme points on a chart and dividing the vertical distance by the key Fibonacci ratios. 0.0% is considered to be the start of the retracement, while 100.0% is a complete reversal to the original part of the move. Once these levels are identified, horizontal lines are drawn and used to identify possible support and resistancelevels. See Trend Lines. The significance of such levels, however, could not have been statistically confirmed.Arthur Merrill, CMT determined there is no reliable standard retracement; not 50%, 33%, 38.2,61.8%,or any other. See his book “Filtered Waves.”
The 0.618 Fibonacci retracement that is often used by stock analysts approximates to the “golden ratio”.