Fibonacci retracement is a widely used tool in technical analysis, touted by traders as a method to identify potential support and resistance levels using key percentages derived from the Fibonacci sequence—23.6%, 38.2%, 50%, 61.8%, and 78.6%. These levels are believed to represent natural market turning points after a price movement, grounded in the idea that financial markets follow mathematical patterns found throughout nature.
But does this method actually work?
After extensive backtesting across 102 stocks and major indices—including the Nasdaq 100 and S&P 500—our research reveals a 63% failure rate for Fibonacci retracement in predicting price reversals. This means it performs worse than random chance. Combined with findings from ten academic studies, the evidence strongly suggests that Fibonacci-based trading should not form the foundation of any serious trading strategy.
Understanding the Fibonacci Sequence
The Fibonacci sequence is a mathematical series where each number is the sum of the two preceding ones: 0, 1, 1, 2, 3, 5, 8, 13, 21, and so on. First introduced to the Western world by Leonardo of Pisa (also known as Fibonacci) in his 1202 book Liber Abaci, this sequence appears in various natural phenomena—from spiral galaxies to nautilus shells.
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The Golden Ratio: Phi (φ)
A core concept behind Fibonacci trading is the golden ratio, approximately 1.618 (or its inverse, 0.618). This ratio emerges when dividing a number in the sequence by its predecessor. Proponents claim that markets respect these proportions, making the 61.8% retracement level especially significant for predicting trend reversals.
However, empirical testing tells a different story.
What Is Fibonacci Retracement?
Fibonacci retracement is a charting technique where traders draw horizontal lines at key Fibonacci percentages between a recent high and low. These lines are interpreted as potential zones where price might reverse or stall—offering entry or exit opportunities.
Common retracement levels include:
- 23.6%
- 38.2%
- 50% (not a true Fibonacci number but widely accepted)
- 61.8%
- 78.6%
While visually intuitive, their predictive power remains questionable.
Why Do Traders Believe in Fibonacci?
Many traders adopt Fibonacci retracement due to its widespread use and aesthetic appeal on charts. The theory suggests that after a strong move, prices often retrace a predictable portion—typically one of the Fibonacci ratios—before resuming the original trend.
This belief feeds into the notion of self-fulfilling prophecy: if enough traders watch the same levels, they may act collectively at those points, creating temporary support or resistance.
Yet, our analysis challenges this logic.
How Fibonacci Was Tested: Methodology
To evaluate its effectiveness, we conducted manual backtesting across:
- All components of the Nasdaq 100
- The S&P 500 Index
- The Nasdaq Composite Index
Testing Period: December 2021 (pre-crash peak) to July 2023 (partial recovery)
Success Criteria: A price reversal within ±5% of a Fibonacci level over a 3–5 day window
Failure: Reversal occurring outside this range
This period included a major market downturn and rebound—ideal for testing retracement accuracy.
Backtest Results: Fibonacci Fails More Often Than Not
Across all 102 assets tested, Fibonacci retracement correctly predicted reversals only 37% of the time, resulting in a 63% failure rate.
| Level | Success Rate |
|---|---|
| 23.6% | 23% |
| 38.2% | 20% |
| 50% | 20% |
| 61.8% | 21% |
| 100% | 16% |
| Overall | 37% |
Notably, the much-touted 61.8% "golden ratio" level performed no better than others, undermining its legendary status in technical analysis.
S&P 500 Test: Only 40% Accuracy
As a broad-market benchmark, the S&P 500 should reflect reliable patterns if Fibonacci had merit. However, it reversed near Fibonacci levels just 40% of the time, meaning 60% of reversals occurred elsewhere—worse than a coin toss.
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Nasdaq 100: A 67% Failure Rate
In fast-moving tech stocks, Fibonacci performed even worse. On the Nasdaq 100, it failed to anticipate reversals 67% of the time, suggesting it's particularly unreliable in volatile or momentum-driven markets.
Why Fibonacci Retracement Should Be Avoided
Despite its popularity, Fibonacci retracement lacks statistical validity for consistent trading success. Here’s why:
- High False Signal Rate: With over six out of ten signals failing, relying on Fibonacci leads to more losing trades.
- Subjectivity in Application: There’s no standardized rule for selecting swing highs and lows—different traders draw levels differently.
- No Mechanized Backtesting Support: Leading platforms like TradingView and TrendSpider don’t automate Fibonacci testing because it resists objective rules.
- Self-Fulfilling Prophecy Fallacy: If Fibonacci were truly self-fulfilling, our tests and academic research would show higher accuracy. They don’t.
"Markets are driven by news, sentiment, liquidity, and macroeconomic shifts—not abstract mathematical sequences."
Academic Research: Mixed Evidence at Best
While some studies suggest limited efficacy in specific markets (e.g., Indian equities or Indonesian stocks), most rigorous analyses find little statistical edge:
- A computational study found similarities but no actionable edge [1].
- Research on U.S. energy stocks showed no effectiveness [3].
- An LSTM-based AI model suggested some utility in bounce detection [4], though real-world replication remains unproven.
- Multiple papers acknowledge usage but fail to demonstrate consistent profitability.
The consensus? At best, Fibonacci may offer psychological comfort—not analytical advantage.
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Frequently Asked Questions (FAQ)
Does Fibonacci retracement work in trading?
No. Our backtesting shows a 63% failure rate, meaning it predicts reversals less accurately than random chance. It should not be used as a primary or standalone indicator.
Is the 61.8% Fibonacci level special?
Despite being called the "golden ratio," our data shows it performs no better than other levels—averaging only 21% success. There's no statistical justification for treating it as superior.
Can I use Fibonacci for day trading or swing trading?
While some traders incorporate it visually, our results show it fails over 60% of the time in both short-term and medium-term strategies. More reliable tools include RSI, VWAP, ROC, and Heikin Ashi candles.
Why do so many traders still use Fibonacci?
Its appeal lies in simplicity and visual symmetry. Once taught widely in trading courses and repeated across financial websites, it persists through repetition—not performance.
Do professional traders use Fibonacci retracement?
Very few institutional traders rely on it systematically. Proprietary trading desks and hedge funds prioritize quantifiable, backtested strategies over subjective drawing tools with poor hit rates.
What should I use instead of Fibonacci?
Focus on indicators with proven track records:
- Relative Strength Index (RSI) – measures momentum
- Volume Weighted Average Price (VWAP) – tracks institutional activity
- Rate of Change (ROC) – detects acceleration
- Heikin Ashi Charts – smooths noise for clearer trends
These tools have demonstrated success rates above 70% when properly applied.
Final Verdict: Time to Retire Fibonacci Retracement
After analyzing over a decade of market data across major indices and individual stocks, the conclusion is clear: Fibonacci retracement is not a reliable tool for trading decisions.
It fails more often than it works, lacks standardization, and cannot be effectively backtested—critical flaws for any serious strategy. While it may occasionally align with price action due to chance or crowd behavior, that’s not a basis for consistent profitability.
For traders seeking an edge, the future lies in data-driven models, algorithmic systems, and rigorously tested indicators—not centuries-old number sequences with no empirical foundation.
Let go of the myth. Trade with evidence.