Fibonacci Retracement, aka "fibs", refers to the chance that a stock's price will retrace a portion of an original move and find support or resistance at key Fibonacci levels before continuing in the original direction. Used in stock trading and options trading, the levels are established, based on a trendline, between two highest/lowest points divided by the vertical distance by the Fibonacci ratios: 0%, 23.6%, 38.2%, 50%, 61.8%, 78.6% and 100%.
These are used mainly to help identify places for transactions to be placed, and are also used by technicians to establish targets and/or stops. 50% retracement is the most commonly traded Fibonacci level, therefore there tends to be quite a bit of support in relation to the 50% retracement pullback level from an upside move as well as quite a bit of resistance at 50% retracement pop from a downside move.
Furthermore, Fibs are utilized as rule sets in several technical patterns. For example, if a bull flag retraces more than 38.2% of the flag pole while creating the flag it is considered null and void by many technical traders.
Here is a visual of BRCM nearing potential support at the 50% retracement level. Whether or not the stock will bounce off 50% retracement is yet to be seen, but one can almost guarantee there will be some sort of intraday bounce off the level. Therefore, this would be a great level to watch and day trade within the live trading room.
Related terms: Geometric vs. Functional Indicators, Simple Moving Average, Exponential Moving Average, Moving Average Convergence Divergence, Relative Strength Index, Elliot Wave Theory.