Sometimes It’s Good to Fibonacci

Need help with setting targets for trades? Fibonacci retracements provide a quick view of some potential support and resistance points in your stock charts. retracements
2 min read
Photo by thinkorswim Charts

Let’s face it: trading the markets would be a whole lot easier if you knew what was going to happen tomorrow (or next week, or next year). Of course, nothing can predict the future, but you might consider using a charting tool called Fibonacci retracements in your pursuit of a consistent trading strategy.

Leonardo Fibonacci was an Italian mathematician in the Middle Ages who used his brilliance to, among other things, help solve a problem about rabbit population growth. (It can’t be proved that he also opened a ristorante to solve it.) The solution was a sequence that later became known as Fibonacci numbers. Starting with 0 and 1, each number is the sum of the two previous numbers, so the sequence goes 0,1, 1, 2, 3, 5, 8,13, 21, and so on. As the sequence gets higher and higher, dividing two consecutive numbers by each other keeps getting closer to the “goldenratio” of 1:1.618 (or 0.618:1). The golden ratio appears frequently in nature and has been used in architecture for centuries.

SPX fib retracement

FIGURE 1: In January 2011, SPX was in the midst of a strong uptrend. The index pulled back on January 28, and then the trend resumed. In the thinkorswim chart shown, the Fibs are drawn from the January 28 high to the January 20 low, and the 161.8% retracement line indicates the target near $1,322. The SPX made it to the target on February 7 and 8. For illustrative purposes only. Source: thinkorswim Charts

Rabbits and Trading

So now you’re wondering how this applies to trading, right? Well, it just so happens that a lot of math geeks like trading, too. So they started applying Fibonacci numbers and the golden ratio to stock prices and, presto! Fibonacci retracements (we’ll call them Fibs) were born. Fibs are based on the idea that stocks tend to retrace part of a move before continuing in the original direction. One of the ways you can use them is to set target exits for “swing” trades—short-term momentum trades that typically last from a few days to a few weeks. After all, getting into a trade is the easy part, but it’s the exits that can make or break you.

Here’s how it works: find a stock that’s been trending fairly strongly up or down. For an up-trending stock, draw the Fibs from the most recent high to the low point where the move began (for a down-trending stock, draw the Fibs from low to high). Enter the trade on a pullback from the high point, and set your target at the 161.8% Fib level (there’s that golden ratio again).

Now, the trade isn’t going to work every single time, of course, so make sure you manage your risk with a stop-loss, too (1 % to 3 % below the entry price is a popular choice). You may find that setting up the orders ahead of time helps you manage your trading emotions better.

One of the keys to trading success is finding a regular, repeatable strategy. It’s not about predicting the future; it’s about finding a consistent approach to taking profits. Fibonacci retracements can help.

Call Us

Do Not Sell or Share My Personal Information

Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.

Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

A stop order, often called a “stop loss” order will not guarantee an execution at or near the activation price.  Once activated, they compete with other incoming market orders.


Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.

TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2024 Charles Schwab & Co. Inc. All rights reserved.

Scroll to Top