Overview of Fibonacci Retracement
Fibonacci was an Italian mathematician during the 12th and 13th centuries that found a sequence of numbers that occurred frequently in nature. Basically, the sequence is found by adding the previous two numbers together. So if you start with 0 and 1 the pattern will be: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89. Fibonacci then found that if you take the ratio of any number to the number that comes after it in the sequence you get .618. He also found that if you take the ratio of any number to the two numbers higher in the sequence you get .382. For example, 34/55 = .618 and 34/89 = .382.
Fibonacci levels are found by taking the most recent high for a session and the most recent low and taking the Fibonacci ratios of those two points to find potential levels of support and resistance. Those levels of support and resistance can then be used to make trades.
Most trading platforms will calculate the levels for you after you select the highs and the lows for the session. An example is shown below.