Fibonacci retracement is a technical analysis tool that uses horizontal lines to indicate where potential support and resistance levels may occur. The levels are derived from the Fibonacci sequence and are expressed as percentages of a prior price move: 23.6%, 38.2%, 50%, 61.8%, and 78.6%.

The formulas depend on the trend direction. For an uptrend retracement: Level = Swing High - (Swing High - Swing Low) x Percentage. For a downtrend retracement: Level = Swing Low + (Swing High - Swing Low) x Percentage. The key insight is that after a significant price movement, prices tend to retrace a predictable portion of that move before continuing in the original direction.

For example, with a swing high of $150 and swing low of $100 in an uptrend, the 61.8% retracement level would be $150 - ($50 x 0.618) = $119.10. Traders watch these levels closely because they often coincide with areas where buying or selling pressure increases, making them useful for setting entry points, stop-losses, and profit targets.