What is the difference between Fibonacci retracement and extension?

While Fibonacci retracements apply percentages to a pullback, Fibonacci extensions apply percentages to a move in the trending direction. For example, a stock goes from $5 to $10, then back to $7.50. The move from $10 to $7.50 is a retracement. If the price starts rallying again and goes to $16, that is an extension.

What is a Fibonacci retracement percentage?

The percentage is how much of a prior move the price has retraced. The Fibonacci retracement levels are 23.6%, 38.2%, 61.8%, and 78.6%. While not officially a Fibonacci ratio, 50% is also used. The indicator is useful because it can be drawn between any two significant price points, such as a high and a low.

Are Fibonacci retracement levels relevant in financial markets?

Fibonacci numbers are found throughout nature. Therefore, many traders believe that these numbers also have relevance in financial markets. Fibonacci retracement levels were named after Italian mathematician Leonardo Pisano Bigollo, who was famously known as Leonardo Fibonacci. However, Fibonacci did not create the Fibonacci sequence.