Definition
Draw the tool from a swing low to a swing high (or the reverse in a downtrend). Common levels are 23.6%, 38.2%, 50%, 61.8% and 78.6% of the move. The 61.8% level comes from the golden ratio. The 50% level is not a Fibonacci ratio but is widely watched.
Watch out for
Which swing points to use is a judgment call, and levels are zones, not exact prices. Evidence that they work on their own is weak. They matter mainly because many traders watch the same ones.
Example
Hypothetical exampleIf a stock rises from $50 to $100 and then pulls back 50% of that move, it is at $75. A 61.8% retracement would be at about $69.