Fibonacci retracements trace their roots back to Fibonacci numbers where were discovered centuries ago and developed into a technical analysis tool.

The Fibonacci retracements are calculated by using common Fibonacci ratios which are calculated from the Fibonacci sequence.

You can use the Fibonacci retracements to uncover support and resistance levels which can be used as targets to either stop out of a position or take profit on a trade.

Additionally, you can use these target levels as confirmation indicators used in conjunction with other technical indicators such as moving averages, stochastics, and momentum.

The most common Fibonacci ratios are the 38.2% ratio and the 61.8% ratio. Other ratios are also used, such as the 50% ratio first described in Dow Theory, as well as the 23.6% ratio, which represents a short-term target.

Fibonacci retracements can be used as a risk management tool. The targets can be used to determine your risk versus reward ratio before entering a trade, as well as, an active management tool to uncover new levels of support and resistance.

One of the most important concepts that are uncovered by the Fibonacci retracements is periods when the market is likely to consolidate.

These levels initially do not provide a gauge to whether the market is pausing only to refresh or reversing. When prices begin to consolidate around a Fibonacci level, a retest of the level will be inevitable.

If prices continue to trend through the 38.2% retracement they are likely to test the 61.8% retracement.