Fibonacci levels and sequences are not secret ratios nor price patterns found in the nature of markets. It is rather a popular method, or indicator, to analyze an asset’s price action in financial markets, and like other popular indicators, its relevance rests with its self-fulfilling popularity.

Fibonacci levels can be divided into two categories; retracements and extensions. Retracement levels are applied to an asset’s price after a new high, on an uptrend, or a new low, on a downtrend, and when traders identify a temporary end of a trend. When the market starts consolidating, there will be pullbacks, or market corrections, the so-called Fibonacci retracement levels.

Key Fibonacci Retracement Levels 0.236, 0.382, 0.500, 0.618, 0.764

On the other hand, Fibonacci extension levels are applied to an asset’s price as the continuation of the trend. Market prices can (not necessarily) correct to one of the Fibonacci retracements levels, and then carry on moving in the direction of the underlying trend, making new highs or lows. Or it might just carry on moving in the direction of the main trend after a consolidating period without touching any Fibonacci retracement levels.

Key Fibonacci Extension Levels  0.382, 0.618, 1.000, 1.382, 1.618

Just as there is no magical or universal law to the Golden Ratio, so there is no magical or universal law within any of the Fibonacci ratios. They are simply interesting ratios discovered by mathematicians and later adopted by traders.

Traders globally have been allured by the magical feeling of the Fibonacci ratios in the markets. Because it is an indicator used globally, including several professional traders, with many buying and/or selling on these levels, Fibo levels can be very effective.