Fibonacci retracement
What are the ratio-based levels traders watch after a big move, and why do they work only as a shared convention?
In plain words
A Fibonacci retracement draws horizontal lines between a swing low and a swing high at fixed fractions of the distance between them, using ratios taken from the Fibonacci sequence. Traders watch these lines as possible places where a pullback may stall.
Why it matters
Because so many participants watch the same lines, orders can cluster near them, which makes the levels matter a little. But nothing in the arithmetic forces a price to stop there; they are a widely shared drawing convention, not a law of motion, so they are better read as reference points than as guarantees.
In a real week: ETH, week of 30 August 2021
ETH's week starting 2021-08-30 ran from a low of 3143.0 on Mon at 03:00 UTC to a high of 4027.88 on Fri at 14:00 UTC, a range of 28.15%. A retracement drawn between that low and high would place its lines in the space between them. ETH closed the week at 3950.29, up 22.55%, with a close location of 91.2, in the upper third of the week range, so it finished near the top of the move and far above where any deeper retracement line would sit.
A common mistake
Treating the levels as self-fulfilling prices. They describe where a pullback would land, not where it must stop, and a different choice of swing high or low moves every line.