How to use Support and resistance on stock charts and using these to determine when to buy and sell!

 

Support and Resistance: The Levels Every Chart Respects

If you've spent any time looking at stock charts, you've probably noticed something odd: price often seems to stop at the same spot over and over again, as if there's an invisible floor or ceiling. That's not a coincidence, and it's not magic — it's one of the oldest and most widely used concepts in technical analysis: support and resistance.

Before you reach for a more exotic indicator, support and resistance is usually the first thing worth learning to see on a chart, because almost every other tool — moving averages, RSI, candlestick patterns, you name it — gets more useful once you already know where the "important" price levels are.

The good news is that, unlike some technical indicators, support and resistance doesn't require any calculation at all. It's really just a disciplined way of describing something your eyes can already notice once you know what to look for.

What Support and Resistance Actually Are

Support is a price level where a stock has tended to stop falling and bounce back up. Think of it as a floor: every time the price drops down to that area, buyers seem to show up in enough force to push it back up. Resistance is the mirror image — a price level where a stock has tended to stop rising and turn back down, as if there's a ceiling that sellers keep defending.

Why do these levels exist at all? A few plain-language reasons show up again and again:

Round numbers often act like magnets — a stock bumping into $50 or $100 repeatedly isn't unusual, partly because many investors place buy and sell orders at tidy, memorable prices. Prior highs and lows matter because investors remember where a stock has turned before, and tend to act the same way when it gets there again — which becomes a bit self-reinforcing. And large concentrations of past buying or selling, like a heavy-volume day where a lot of shares changed hands at a particular price, tend to leave a "crowd memory" at that level: people who bought near there may be eager to sell once they're breakeven, and people who missed buying there may be eager to buy if price returns.

One of the more useful things to understand early on is that support and resistance aren't fixed forever. A resistance level that gets broken through convincingly often flips and becomes a new support level going forward — and the same thing can happen in reverse. Traders sometimes call this "role reversal," and it's one of the more reliable patterns in this corner of chart reading.

How to Actually Find These Levels on a Chart

You don't need a formula for this — you need a slightly trained eye. The simplest approach is to look at a stock's chart over several months and mark the price levels where it has turned around more than once. The more times price has reversed at roughly the same level, the more significant that level is generally considered to be.

A few other common ways traders identify these zones: drawing a trendline connecting a series of rising lows (an "uptrend line" that can act as dynamic support) or falling highs (a "downtrend line" acting as dynamic resistance); watching widely used moving averages, like the 50-day or 200-day, which many stocks seem to respect as a form of support or resistance in their own right; and looking for areas where trading volume was unusually heavy, since those zones often turn into support or resistance later.

It's worth being honest that this is part art, not pure science — two traders looking at the same chart can reasonably draw their support and resistance lines in slightly different places. That's fine. The goal isn't pinpoint precision; it's identifying general zones where the balance between buyers and sellers has shifted before.

A Worked Example: XYZ Industries

Here's a simple, fully hypothetical example to tie this together. Imagine a fictional company, XYZ Industries, trading in a well-defined range for several months. Every time the stock drifts down to around $40, buying interest picks up and it bounces — this happens three separate times over about four months, each time holding right around that $40 level. That's a textbook support zone.

At the same time, every time XYZ Industries rallies up toward $55, it stalls out and drifts back down — again, this happens multiple times. That $55 area is acting as resistance.

A trader watching this pattern might treat $40 as a reasonable area to consider buying (with a plan for what to do if it breaks below, since no level holds forever) and $55 as an area where they might take some profit or tighten a stop, anticipating the stock could stall there again.

Now suppose that, on the fourth attempt, XYZ Industries doesn't stall at $55 — it breaks through on strong volume and keeps climbing to $62. Under the "role reversal" idea mentioned earlier, that old $55 resistance level often becomes a new support level if the stock pulls back toward it later. Watching whether price holds above $55 on a future dip, instead of falling back through it, is exactly the kind of follow-up question a support-and-resistance-minded trader would ask next.

A True chart in action:

Here is a chart of IBM with support and resistance lines - you can do this using the tools on the interactive stock chart page and try it out yourself using the tools on the left hand side of the chart. 

Try it for some of the stocks you follow - breaking through resistance is called a breakout and there can be false breakouts also. Same for support - it is called a breakdown - and there can be false breakdowns also. You have to wait for follow through to see if the trend continues and use your other indicators to determine if these breakdowns and breakouts are valid. 

And at TRUCHARTS.COM you can set these levels using our ALERT feature and get an email alert when these levels are reached. Try it out.

Limits and Risks of Trading Support and Resistance

As useful as this concept is, it has real limitations worth keeping in mind.

First, support and resistance levels are zones, not laser-precise lines. Expecting a stock to bounce the instant it touches an exact price can lead to disappointment — price often overshoots a little in both directions before reversing, if it reverses at all.

Second, every support level eventually fails at some point if enough selling pressure builds up, and every resistance level eventually gives way if enough buying pressure builds up. A level holding three or four times in the past is informative, but it is not a guarantee it holds a fifth time. Treating these levels as certainties rather than probabilities is one of the more common mistakes newer traders make.

Third, because so many traders are watching the same obvious levels, there's a somewhat self-fulfilling quality to this concept — but that also means sudden news, earnings surprises, or broad market moves can blow through a well-established level with little warning, regardless of how "respected" it has been historically.

Finally, like most tools in this series, support and resistance tends to work best combined with other evidence — a bounce off support that also lines up with a bullish candlestick pattern or an oversold RSI reading carries more weight than a bounce off support alone. It's a foundational concept, not a stand-alone trading system.

Practice spotting these levels on real charts

Support and resistance is a skill you build by looking at a lot of charts. TruCharts' interactive stock charts make it easy to scroll through a stock's price history, draw your own trendlines, and see for yourself how often price respects — or breaks through — the same levels over time.

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Before acting on a bounce off support or a rejection at resistance, it's worth checking what's happening underneath the stock as a business. TruCharts' earnings and financials tools let you check a company's recent revenue, earnings, and margin trends, so a technical setup lines up with — rather than works against — the fundamental picture.

Coming up next week, we'll shift from static price levels to patterns that unfold in the candles themselves: candlestick reversal patterns every investor should recognize — many of which show up right at the support and resistance levels you just learned to spot.

This article is for educational purposes only and does not constitute financial or investment advice. Any hypothetical examples, including "XYZ Industries," are illustrative only and do not represent real securities or guaranteed outcomes. Support and resistance levels are observations about past price behavior, not predictions or guarantees of future performance. Always do your own research and consider consulting a licensed financial advisor before making investment decisions.

RSI and MACD (a good combination to use) - How to use these to see momentum trends and understanding divergences

 

Reading Momentum: Spotting Bullish and Bearish Divergence With RSI and MACD

In 1991, technical analyst Martin Pring published "Technical Analysis Explained," a book that became one of the standard references for traders trying to understand price behavior beyond simple chart patterns. One of the ideas Pring helped popularize for a generation of retail traders is divergence, the situation where a stock's price and a momentum indicator built from that price start telling two different stories. When that happens, Pring's core insight was simple: trust the indicator's warning before the price confirms it, because momentum tends to shift before price does.

Divergence is a term for a mismatch. It shows up when price makes a new high or low, but a momentum indicator, a tool that measures the speed and strength of recent price moves rather than the price level itself, fails to confirm that new extreme. Two of the most widely used momentum indicators for spotting this are the Relative Strength Index (RSI), which measures how fast and how far a stock has moved up versus down over a recent period, and the Moving Average Convergence Divergence indicator (MACD), which compares two moving averages of price to gauge whether buying or selling pressure is accelerating or fading.

This concept has stuck around for decades because it addresses a problem every trader eventually runs into: price alone does not tell you whether a move has real strength behind it or is running on fumes. A stock can keep grinding to new highs while the underlying buying pressure is quietly weakening, and divergence is one of the more reliable early warnings that a trend's momentum, not just its price, is starting to roll over. It will not catch every reversal and it is not a signal to act on alone, but once you can see it on a chart, you will start noticing it everywhere.

What Divergence Is and How to Read It

Start with the basic vocabulary. A bearish signal is one that suggests downward pressure or weakening upside momentum; a bullish signal suggests the opposite, upward pressure or weakening downside momentum. Overbought and oversold describe the extremes of an indicator's typical range, generally RSI above 70 is considered overbought (the move may be stretched) and RSI below 30 is considered oversold (the selloff may be stretched).

Bearish divergence happens when price prints a higher high (a peak above its previous peak) while the momentum indicator prints a lower high (a peak below its previous peak) over that same stretch of time. In plain terms, the stock is still climbing, but each new push upward is getting weaker under the hood. That mismatch is a caution flag, it does not mean the stock will fall immediately, but it tells you the rally's engine is losing power even as the car is still moving forward.

Bullish divergence is the mirror image: price makes a lower low while the momentum indicator makes a higher low. The stock is still falling, but the selling pressure behind each new low is getting weaker, which can be an early sign that sellers are running out of conviction.

The reason this works at all comes down to how RSI and MACD are built. Both are derived from the rate of change in price, not the price level itself. A stock can keep inching to new highs on smaller and smaller gains, which is exactly the kind of fading momentum that shows up as a flattening or declining indicator even while the price line keeps rising. RSI tends to be the more sensitive, faster signal, useful for spotting divergence early, while MACD, because it is built from two moving averages, tends to confirm a shift with a bit more lag but also a bit more reliability. Using both together, as this week's charts do, is a common way to avoid acting on a divergence signal from only one indicator.

Chart 1: TSLA daily closing price, June 10 to October 30, 2026 (top panel), with a 14 period RSI below. Between early September and October 9, TSLA's closing price pushed to three successive higher highs (the red dashed line), while RSI over that same stretch made a lower high (the red dashed line in the bottom panel). That mismatch, rising price, fading momentum, is the bearish divergence this week's lesson is built around.

A Worked Example: TSLA's September to October Divergence

This week's chart uses real, unmodified daily closing data for Tesla (TSLA) pulled directly from market data for this article. No split adjustment was required for this window because TSLA's most recent stock split took effect in August 2022, well before the June through October 2026 period shown here.

Look at the three price peaks marked on Chart 1. On September 3, 2026, TSLA closed at roughly $376.37 with RSI at about 61.8. On September 23, it closed higher at about $380.12, with RSI essentially flat at about 61.2. Then on October 9, TSLA closed at its highest point of that stretch, about $382.70, but RSI had slipped further to roughly 60.0. Each price peak was higher than the last. Each RSI peak was lower than the last. That is bearish divergence by the book: the stock kept climbing, but the momentum behind the climb was quietly fading with every new high.

Chart 2 shows the same window with MACD swapped in underneath price instead of RSI, as a second, independent check on the same signal. The MACD line told the same story: it measured about 6.42 on September 23 and only about 5.12 by October 9, a lower high even as price notched a higher one. Having two separate momentum indicators agree on the same divergence, rather than relying on just one, is exactly the kind of confirmation Pring's approach to technical analysis emphasizes.

What happened next matters as much as the divergence itself. Within a week of that October 9 high, TSLA fell to a close of about $354.72 on October 16, a decline of roughly 7.3% from the divergence high. That is the kind of follow through that makes traders pay attention to this signal in the first place, though it is worth being honest that not every divergence resolves this cleanly, more on that in the limits section below.

Here is a HYPOTHETICAL illustration only, not a recommendation and not something that actually happened in a real account. If a trader had noticed the bearish divergence forming by October 9 and sold or shorted near that day's close of about $382.70, with a stop loss placed just above the high at, say, $392 (to limit the loss if the breakout kept going instead of reversing), a decline to the $355 area by October 16 would have represented a gain of roughly 7% on the short, against a risk of roughly 2.4% if the stop had been hit instead. That is a hypothetical risk to reward setup only, real trading involves slippage, fees, and the real possibility the trade does not work.

Chart 2 also shows something just as instructive: what it looks like when a new high is NOT accompanied by divergence. By October 27, TSLA rallied to a fresh closing high of about $407.46 for this window, and this time both RSI (about 65.6) and MACD (about 6.27, moving to roughly 9.08 by October 30) also pushed to fresh highs alongside price. No divergence was present. That contrast is the real lesson: divergence is not something you see on every new high, and its absence on a strong move is itself useful information, it suggests the rally has genuine momentum behind it rather than running on fumes.

Chart 2: The same TSLA price series with MACD and its signal line below instead of RSI. The lower high in the MACD line between September 23 and October 9 confirms the divergence seen in Chart 1 on a second, independent indicator. By contrast, the October 27 high was matched by a fresh high in MACD too, showing a healthy move with no divergence warning attached.

Chart 3: With our proprietary BUY/SELL Signal algorithm and the indices all in one chart:

A Checklist Before You Act on Divergence

• Confirm the divergence on both the price chart and the indicator using actual swing highs or lows, not just a general sense that "price is up and the indicator looks lower." Mark the specific peaks or troughs you are comparing.
• Check a second momentum indicator, as this article did with RSI and MACD together, rather than relying on just one. Agreement between the two adds confidence; disagreement is a reason to wait.
• Look at the broader trend context. Divergence against a strong, well established uptrend tends to produce shallower pullbacks than divergence that shows up after a stock is already extended or near a longer term resistance level.
• Wait for price confirmation before acting, such as a break below a recent swing low (for bearish divergence) or above a recent swing high (for bullish divergence), rather than trading the divergence signal the moment you spot it.
• Decide your stop loss and position size before entering, exactly as described in the hypothetical example above, so the trade's risk is defined no matter which way it goes.

Limits and Risks

No chart pattern or indicator, including momentum divergence, works every time. Divergence can persist for weeks without resolving into an actual reversal, and a stock in a genuinely strong uptrend can show repeated minor divergences while continuing to climb regardless, a phenomenon some traders call divergence failure. Acting on every divergence signal in isolation, without confirmation from price action, volume, or the broader trend, is a common way new traders lose money chasing a reversal that never comes.

RSI and MACD are both lagging to some degree, they are calculated from past price data, so by the time a divergence is visible, some of the move may have already happened. False signals happen in both directions, and choppy or range bound markets tend to produce more unreliable divergence signals than markets in a clear trend. This concept works best as one input among several, combined with support and resistance levels, trend direction, volume, and sound risk management such as defined stop losses and reasonable position sizing, rather than as a standalone trading system. Past patterns, including the TSLA example above, are historical observations and are not a guarantee that similar setups will resolve the same way in the future.

See this week's lesson applied live on TruCharts

Reading divergence on a static chart is one thing, finding it yourself on a live chart is the real skill. TruCharts' interactive stock charts let you overlay RSI and MACD on any ticker, including TSLA, stack them beneath the price panel just like this week's examples, and scroll back through real history to practice spotting the same kind of higher high in price paired with a lower high in momentum we just walked through together.

Want next week's chart reading lesson, plus the rest of this series, delivered as soon as it is published? Subscribe to TruCharts to get each week's concept and worked example in your inbox.

Coming up next week: we will look at William O'Neil's cup and handle pattern, a classic base and breakout setup from his book "How to Make Money in Stocks," and walk through how to judge whether a breakout from that base is a proper buy point or a premature one. Read it here once it is live.

This article is for educational and informational purposes only and is not financial or investment advice. Any hypothetical trade examples described above are clearly labeled as hypothetical and do not represent actual trades or guaranteed outcomes. Past price behavior, including the real TSLA data shown here, is not a guarantee of future results. Please consult a licensed financial advisor before making any investment decisions.

How to Read Trend Lines and Support and Resistance Like a Technical Analyst

Long before anyone had a laptop, let alone a phone, traders were drawing lines across hand plotted price charts to figure out where a stock was likely to find buyers or sellers. The idea got its modern, widely taught treatment from John Murphy, whose book "Technical Analysis of the Financial Markets" has introduced several generations of traders to the basic toolkit of chart reading. Trend lines, along with support and resistance, sit right at the center of that toolkit, and they remain one of the first things most people learn when they start looking at charts seriously.

The appeal is simple. A trend line is just a straight line connecting a series of price points, usually swing lows in an uptrend or swing highs in a downtrend, that shows the general direction and pace of a move. Support is a price area where a stock has tended to stop falling and turn back up. Resistance is the mirror image, a price area where a stock has tended to stop rising and turn back down. None of this requires a formula, a subscription, or a computer science degree. It requires a chart and a willingness to look at it honestly.

That last part, honesty, is really the whole game, and it is why this concept is still genuinely useful more than three decades after Murphy first wrote about it. A trend line is only as good as the swing points it is drawn from, and a huge amount of bad trading comes from traders bending a line to fit what they want to see rather than what the chart is actually showing. This week we will build a real, split adjusted trend line on NVDA stock, watch it get tested, watch it actually break, and then watch it get reclaimed, all using real weekly price data rather than a tidy textbook drawing.

What a Trend Line Actually Is, and How to Read One

Start with the raw ingredients: a swing low is a week (or day, depending on your timeframe) where the price dropped and then turned back up, so that the low of that week sits below the lows of the weeks on either side of it. A swing high is the opposite, a week where the high sits above the highs around it. These turning points are the chart's own record of where buyers or sellers actually stepped in.

To draw a rising support trend line, a technical analyst looks for at least two swing lows that are both higher than the one before, then connects them with a straight line and extends that line forward into the future. The logic is that if buyers have twice shown up around a rising price level, they may show up there again. A falling resistance trend line works the same way in reverse, connecting a series of lower swing highs.

Two touches is the minimum to draw a line. Three or more touches, especially if they are spread out over weeks or months rather than clustered together, is what gives a trend line real credibility. A line drawn through two points that happen to line up by coincidence is not much more than a guess; a line that price has respected three or four separate times, across different market conditions, is telling you something about how that particular stock is being traded.

The other habit worth building early is distinguishing a wick from a close. Weekly candlestick charts show four prices for the week: the open, the close, and the high and low, usually drawn as a thin line (the "wick" or "shadow") extending above and below a thicker body. Price can dip below a trend line on a wick, meaning it traded there briefly during the week, without actually breaking the trend. What matters more to most technical analysts is where the price closed. A single week that closes back above a trend line after dipping below it on a wick is usually read as the trend line holding, or being "tested" successfully. Multiple weeks in a row closing below the line is a much stronger signal that the trend line has genuinely broken, sometimes called a "breakdown."

A Real Trend Line on NVDA, Start to Finish

Here is the whole sequence, built entirely from real weekly OHLCV data pulled this week and adjusted for NVDA's stock splits so the chart is not distorted by the mechanical price drop a split causes. The first swing low used to anchor the line sits in the week of September 5, 2025, at a low of $164.07. The second sits in the week of November 28, 2025, at a low of $169.55, higher than the first. Two points, both higher than the last, is enough to draw the line and project it forward.

The first real test came in the week of February 6, 2026. The weekly low that week was $171.03, which actually dipped slightly below where the projected trend line sat at that point ($174.12), but the week closed at $185.41, well above the line. By the "close, not wick" standard most technical analysts use, that is a trend line holding, not breaking. This is exactly the kind of moment that separates a careful trend line reader from someone who panics at the first lower wick they see.

Then, in late March 2026, something more serious happened. Over the three weeks of March 20, March 27, and April 2, 2026, NVDA closed at $172.70, $167.52, and $177.39, all below where the trend line sat during those weeks (roughly $176.86 to $177.77). Three consecutive closes below the line is a real break by almost any reasonable definition, not a wick, not a one week fluke. If you were following this trend line in real time, this is the point at which you would reasonably conclude the rising support had failed.

Except it was not over. The very next week, April 10, 2026, NVDA closed at $188.63, decisively back above the trend line, which by then sat near $178.23. The breakdown had failed to follow through, and the stock went on to make a new higher low in the week of July 2, 2026, at $189.80, still above the trend line and consistent with the original uptrend. As of the most recent close in this data set, October 23, 2026, NVDA closed at $210.96, while the same trend line, extended all the way out, sits near $191. More than a year after it was first drawn from two swing lows, the line is still technically intact, even though price broke below it on a closing basis for a few weeks along the way.

This is a genuinely useful, if slightly messy, real world lesson. Murphy's own writing on trend lines is clear that a line is a tool for organizing your thinking about a trend, not a guarantee, and that both false tests and false breaks happen regularly. The NVDA example above has both: a false test in February (the wick below, close above), and what looked like a real break in March and April that ultimately reversed. Reading a trend line well means being able to sit with that kind of ambiguity instead of forcing a clean story onto the data.

A Closer Look, With a Hypothetical Trade Example

Chart 2: A zoomed in view of the same NVDA trend line from October 2025 through July 2026, isolating the February test, the March to April break, and the April reclaim, with a hypothetical entry, stop, and target overlaid for illustration.

Zooming in on the test, break, and reclaim makes the sequence easier to see week by week. It also lets us walk through a HYPOTHETICAL way a trend line follower might have approached this setup. This is not a recommendation and not a claim about what any real trader did; it is purely an illustration of how the concept connects to a trading decision.

HYPOTHETICAL example: suppose a trader waited for confirmation rather than acting on the first dip below the line, and bought NVDA on the close of April 10, 2026 at $188.63, the week the stock reclaimed the trend line after the three week break. A reasonable, structurally based stop loss would sit below the broken low from that sequence, around $163, giving the trade room to breathe without ignoring the possibility that the breakdown was real after all. A first target might be set near the next visible resistance zone from recent chart history, around $230. Again, this entire paragraph is a hypothetical illustration built after the fact to show how the pieces fit together, not a performance claim or investment advice.

Notice what this example does and does not do. It does not try to catch the exact bottom of the dip in March, which is usually a low probability bet. It waits for the close to confirm that buyers had stepped back in, which costs some upside but avoids acting on noise. That tradeoff, giving up the first few dollars of a move in exchange for more confidence that the move is real, is one of the central judgment calls in trend line trading.

A Checklist Before You Act on a Trend Line

• Does the line actually connect at least two, and ideally three or more, real swing lows or swing highs, rather than being drawn to pass near one or two candles that do not clearly stand out as turning points?
• Are you judging a "break" by the closing price over multiple periods, not by a single wick poking through the line for a few hours or one week?
• Does the trend line agree with what the stock is doing on a higher timeframe (for example, does a weekly support line sit in roughly the same place as a monthly one), or is it only visible if you zoom in tightly?
• Have you checked whether volume increased on the move that tested or broke the line, since a break on unusually heavy volume generally carries more weight than one on a quiet week?
• Do you already know, before you act, exactly where you would be wrong, meaning a specific stop loss level, rather than deciding that after the trade is already open?

Limits and Risks

Trend lines are a useful organizing tool, not a precise predictive instrument, and it is worth being direct about that. Because they are drawn by a human (or by software following rules a human set), two careful chart readers can draw slightly different lines on the exact same chart and reach different conclusions about whether it has broken. The NVDA example above shows a trend line that was "broken" for a few weeks before resuming its climb; a trader who treated that break as final and exited or shorted the stock would have been faked out, at least for this particular stretch of 2026.

False breaks and false tests happen in both directions, and there is no setting or rule that eliminates them entirely. Trend lines also tend to work better in trending markets than in choppy, sideways ones, where price can cross back and forth over a line repeatedly without either side ever really winning. For these reasons, most experienced chart readers treat a trend line as one input among several, combining it with other forms of confirmation such as volume, momentum indicators, or the broader market environment, and they manage risk with a predefined stop rather than assuming any single line will hold. No pattern or indicator in technical analysis works every time, and trend lines are no exception.

Try it yourself on TruCharts. The interactive stock charts at trucharts.com let you draw and test your own trend lines directly on real price history, including NVDA. Pull up the same stretch of 2025 and 2026 covered in this article, add the line tool, and see for yourself where the test, the break, and the reclaim sit, before scrolling forward to see what actually happened next. It is a much better way to build the habit of reading closes instead of wicks than staring at a static image.

Subscribe to TruCharts to get next week's chart reading lesson, plus full access to the charting, screener, and back-testing tools, delivered straight to your inbox.

Coming up next week: we will look at reading momentum rather than price directly, covering how to spot bullish and bearish divergence using RSI and MACD, an idea most closely associated with Martin Pring's book "Technical Analysis Explained." Read next week's article once it is live.

This article is for educational and informational purposes only and does not constitute financial or investment advice. Any hypothetical trade examples described above are clearly labeled as hypothetical and are not a record of actual trades or guaranteed outcomes. Past price behavior, including the NVDA example used here, does not predict future results. Please consult a licensed financial advisor before making any investment decisions. 

The Interesting Fibonacci Retracement Levels for stock trading: Finding Where a Pullback Might Stop

 

Fibonacci Retracement Levels: Finding Where a Pullback Might Stop

Every stock that trends higher eventually pulls back for a bit before (hopefully) continuing on its way. The hard part isn't noticing the pullback. It's figuring out where it might stop. Buy too early and the stock could keep falling. Wait too long and you might miss the bounce entirely.

Fibonacci retracement levels are one of the most widely used tools for tackling that problem. They're a set of horizontal lines, drawn between a recent high and low on a chart, that mark the price levels where a pullback has historically had a good chance of pausing or reversing. You'll see them referenced constantly in trading commentary, chart annotations, and technical analysis write-ups, so understanding the basic idea is genuinely useful even if you never draw one yourself.

In this article, we'll explain where these levels come from, walk through a simple worked example, and talk honestly about where the tool falls short, because it absolutely does, and knowing its limits matters as much as knowing how to use it.

What Fibonacci Retracement Levels Are

The name comes from the Fibonacci sequence, a famous string of numbers (1, 1, 2, 3, 5, 8, 13, 21, and so on, where each number is the sum of the two before it) first popularized in mathematics centuries ago. Dividing numbers in that sequence by each other produces a handful of recurring ratios, most notably 23.6%, 38.2%, 50%, 61.8%, and 78.6%. Traders noticed decades ago that prices often retrace (pull back) by roughly these percentages before resuming their prior direction, and the pattern stuck around in technical analysis ever since.

You don't need to calculate any of this by hand. A charting tool lets you click once on a recent swing low and once on a recent swing high (or vice versa for a downtrend), and it automatically draws horizontal lines across those key percentage levels between the two points. The logic in plain language is: "if this stock just rallied from $50 to $100, how far back down might it drift before buyers step back in?" The 38.2% level would sit at $80.90, the 50% level at $75, and the 61.8% level at $69.10, each one a place where traders watch for the pullback to slow down or stop.

The 50% level isn't technically part of the Fibonacci sequence at all, but it's included on virtually every retracement tool because round-number halfway points tend to act as psychological support in their own right. The 61.8% level, often called the "golden ratio," is generally considered the most significant of the group. A pullback that blows through it is often read as a sign the prior trend may be in real trouble, not just taking a breather.

A Worked Example: Hypothetical ABC Corp

Let's say shares of a hypothetical company, ABC Corp, rally from $40 to $60 over a couple of months on strong demand for its products. That's the "swing low" and "swing high" we'd anchor our retracement tool to. After the run-up, the stock starts drifting lower as early buyers take profits.

Using the $40 to $60 range, the key retracement levels would fall at:

23.6%: $55.28
38.2%: $52.36
50%: $50.00
61.8%: $47.64
78.6%: $44.28

Suppose ABC Corp's pullback stalls right around $52, finds buyers for a few sessions, and then turns back upward. A trader watching the chart would note that the stock bounced close to the 38.2% level and treat that as a sign the broader uptrend might still be intact. If instead the stock kept sliding and only found support near $47 to $48, that would line up with the 61.8% level, a deeper, more worrying pullback, but still technically within the bounds of a normal correction rather than a trend reversal. If it had kept falling straight through $44 (the 78.6% level) without pausing at any of these levels, that would be a stronger signal the original uptrend had broken down entirely.

Notice that none of this is a prediction. The levels are areas worth watching more closely, not guaranteed floors. Price can, and often does, blow right through all of them.

Here are a couple of charts from our site for the same stock on two different chart options - the first one is on our classic chart it gets plotted automatically and one for the interactive chart where you can draw these using the tools available on this page. I rarely ever use this.

Classic Chart for stock ACN:

Interactive chart tab (Stock is ACN):

The Limits and Risks of Fibonacci Retracement

Fibonacci retracement is popular, but it's worth being clear-eyed about why it works when it works, and when it doesn't.

First, there's a reasonable argument that these levels are at least partly self-fulfilling. Because so many traders watch the same 38.2%, 50%, and 61.8% lines, enough people place buy or sell orders near them that the levels can become support or resistance simply by popular belief, not because of any deeper mathematical truth about markets. That's not necessarily a reason to ignore the tool, but it's a reason not to treat it as a law of nature.

Second, retracement levels are highly subjective in practice. Two traders looking at the same chart can pick slightly different swing highs and lows, which shifts every level and can produce noticeably different conclusions. There's no single "correct" way to draw the lines, which makes the tool easier to use in hindsight than in real time.

Third, and most importantly, a retracement level is a place to pay attention, not a guaranteed turning point. Stocks frequently blow through every Fibonacci level without pausing, especially during strong trends, broad market sell-offs, or after unexpected news. Treating a 61.8% retracement as a sure-fire buy signal, on its own, is a good way to catch a falling stock with no support underneath it at all.

For these reasons, most experienced chart readers use Fibonacci levels as one input among several, often paired with volume, moving averages, or candlestick patterns at the same price area, rather than as a standalone trading signal.

See it on a real chart with TruCharts' stock screener

Reading about retracement levels is one thing; seeing which stocks are actually sitting near one right now is another. The TruCharts stock screener lets you filter the entire market down to stocks currently pulling back toward a key technical level, so instead of scanning charts one at a time you can see today's candidates for a Fibonacci-style setup in a single list.

Subscribe to TruCharts to save your screens and get a head start on next week's setups.

Coming up next in this series: we'll look at the Average Directional Index (ADX), an indicator that helps answer a different question entirely: not where a pullback might stop, but whether the trend underneath it has any real strength to begin with.

This article is for educational purposes only and does not constitute financial or investment advice. The ABC Corp example above is entirely hypothetical and is used only to illustrate how Fibonacci retracement levels are calculated. Always do your own research and consult a licensed financial advisor before making investment decisions.