What it measures

A Fibonacci retracement takes a swing from a low to a high and marks the prices at fixed fractions of that distance below the high: 0.236, 0.382, 0.5, 0.618 and 0.786. Traders watch those levels as places where a pullback is likely to stop. The fractions come from ratios of consecutive Fibonacci numbers (0.618 is the golden ratio's inverse); 0.5 is not a Fibonacci ratio at all and is included because it is where half the move has been given back.

The calculation

level = swing high − ratio × (swing high − swing low), for each ratio

Extensions beyond the swing use 1.272 and 1.618. In code, the swing is usually the highest high and lowest low of a lookback, or the last two confirmed pivots.

Inputs and defaults

  • The swing: the lookback or the pivot definition that picks the high and the low. This is the whole indicator; the ratios are constants.
  • Which levels count: most strategies trade 0.5 and 0.618, sometimes 0.382.

How it is read

A pullback that holds at 0.382 or 0.5 is read as a shallow retracement in a strong trend, a buy; a drop through 0.618 is read as the trend failing. Confluence of a level with a moving average or a prior pivot is treated as stronger.

Where it fails

There is no mechanism that makes a market stop at 61.8 hundredths of a move; the argument for the levels is that enough traders watch them, which is also the argument against them on a venue where few do. Drawn on the wrong swing they are just lines. Two analysts rarely draw the same swing, and a coded version has to pick one rule for it, which turns the indicator into a lookback parameter.

How the desk reads it

In the screened universe Fibonacci levels appear in pullback strategies, and the desk reads those as reversion rules whose entry level happens to be a fixed fraction of the last swing. The question is what defines the swing in code, because that is the parameter.

In the desk's screen

Of the 614 screened strategies in the library, 16 (2.6%) use this indicator somewhere in their logic.

6 of those were gross-profitable on enough cells to reach the after-fee replay.

The count is read from the compiled code of each strategy in the library; a strategy that computes the indicator by hand under another name is not counted. The desk's own rules are not part of the count.