Fibonacci retracement levels are a popular tool in forex trading used to identify potential support and resistance levels based on key Fibonacci ratios. These ratios, derived from the Fibonacci sequence, are believed to reflect natural patterns of market retracement and continuation. In forex trading, Fibonacci retracement levels typically consist of horizontal lines drawn on a price chart at key Fibonacci ratios, namely 23.6%, 38.2%, 50%, 61.8%, and sometimes 78.6%.

Traders use Fibonacci retracement levels to anticipate where price corrections might halt and where trends may resume. The levels are considered potential areas of support or resistance because they often coincide with significant price levels or chart patterns. For example, if a currency pair is in an uptrend and retraces to the 50% Fibonacci level, traders might expect buying interest to emerge near this level, acting as support.

Conversely, during a downtrend, Fibonacci retracement levels can serve as resistance areas where selling pressure may intensify. Traders combine Fibonacci retracement levels with other technical analysis tools to confirm potential support and resistance zones, enhancing the effectiveness of their trading strategies. However, it's essential to recognize that Fibonacci retracement levels are not foolproof indicators and should be used in conjunction with other forms of analysis and risk management techniques.