Fibonacci Retracement and Extension Explained: Powerful Tools for Stock Market Analysis

Fibonacci Retracement and Fibonacci Extension tools—two popular technical analysis tools used by stock market traders to identify support and resistance levels, as well as price targets.

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Fibonacci Retracement Tool

Purpose:

To identify possible reversal levels (support/resistance) within the current trend.

How It Works:

• Based on the idea that markets retrace a predictable portion of a move before continuing.

• The key retracement levels: 23.6%, 38.2%, 50%, 61.8%, 78.6%

• You draw this tool by selecting a significant high and low on a price chart.

Example:

• Stock moves from ₹100 to ₹150 (uptrend)

• Using Fibonacci retracement, traders look for the price to possibly pull back to around:

  • 38.2% retracement = ₹131.90

  • 50% retracement = ₹125

  • 61.8% retracement = ₹118.10

• These levels may act as support before the price resumes its uptrend.

Also read: VPVR indicator for support and resistance identification

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Fibonacci Extension Tool

Purpose:

To identify potential price targets when the trend continues beyond the previous high/low.

How It Works:

• Built on Fibonacci ratios beyond 100% of a prior price move.

• Common extension levels: 127.2%, 161.8%, 200%, 261.8%

Example:

• Price moves from ₹100 to ₹150 (₹50 move), then retraces to ₹125

• The extension tool will then project target levels from ₹125 onward:

  • 127.2% = ₹125 + (0.272 × ₹50) = ₹138.6

  • 161.8% = ₹125 + (0.618 × ₹50) = ₹155.9

These projected levels often act as resistance (in uptrends) or support (in downtrends) during price continuation.

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Key Differences:

Feature	Fibonacci Retracement	Fibonacci Extension
Use	Find pullback zones	Project future targets
Levels	Below 100%	Beyond 100%
Trend Phase	During correction	During continuation

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Using Fibonacci Tools on TradingView

Fibonacci Retracement:

Steps:

1. Open TradingView and load your stock chart.

2. On the left toolbar, click the third icon (Trend line tools).

3. Select "Fibonacci Retracement".

4. Click on a swing low (for uptrend) and drag to a swing high.

   • For downtrend: drag from swing high to swing low.

5. The retracement levels will appear (23.6%, 38.2%, 50%, 61.8%, etc.).

   • Use these to spot possible buy zones or reversal zones.

Fibonacci Extension:

Steps:

1. Again, use the third icon and select "Trend-Based Fib Extension".

2. Click three points:

   • Point 1: Start of the trend.

   • Point 2: End of the trend.

   • Point 3: End of the retracement.

3. Extension levels like 127.2%, 161.8%, 261.8% will show up as target zones.

Example on Chart:

Let’s say you’re looking at a YES BANK stock chart:

• Price moved from ₹15.92 (low) to ₹ 31.86 (high).

• It then pulled back to ₹17.19.

Fibonacci Retracement:

• You draw from ₹15.92 to ₹31.86.

• You'll see:

  • 38.2% level = ₹25.77

  • 50% level = ₹23.89

  • 61.8% level = ₹22.01

  • 78.6% level = ₹19.33

These levels can act as buy zones in an uptrend.

Fibonacci Extension:

• Draw from ₹15.92 to ₹31.86. then to ₹17.19.

• 161.8% level = Target around ₹ 42.96

• 261.8% level = Target around ₹ 58.86

These become your target levels for booking profits.

How to Change Fibonacci Levels in TradingView:

1. Draw the Fibonacci Retracement or Extension on your chart.

2. Right-click on the drawn Fibonacci tool.

3. Select “Settings” from the menu.

4. Go to the “Levels” tab.

5. You can:

   • ✅ Add or remove levels (e.g., 23.6%, 38.2%, 50%, 61.8%, 78.6%, 127.2%, 161.8% etc.)

   • ✏️ Change the color or line style for better visibility.

   • 💯 Edit the label to show the percentage and price (e.g., %$ to display both).

6. Click OK or Apply to save your changes.

🧠 Note: While Fibonacci Retracement and Extension tools can be useful for identifying potential support, resistance, and price targets, no technical indicator is perfect. These tools work best when combined with strong fundamentals.

📊 Traders and investors should always validate their decisions by analyzing the company’s financial health, earnings growth, debt levels, and overall business model before entering any position. Relying solely on chart patterns can be risky.