Select Page

Fibonacci Retracement Percentages

Leonardo Fibonacci founded Fibonacci numbers and the Fibonacci sequence. They are numbers that are found to exist as part of a sequence that occurs in nature. Traders tend to open and close positions at these retracement percentages, so great significance is placed on them. 0, 23.6, 38.2, 61.8, and 78.6, are the primary Fibonacci retracement percentages used for trading. The Fibonacci retracement levels do extend beyond 100, so be aware of that. Also, 50% and 100% are not Fibonacci retracement percentages, but these levels are consequential enough to include as part of your analysis. 

We have a defined percentage parameter in which a trend frequently retraces before continuing. Because the minimum percentage of this parameter is 33%, and the maximum percentage of this parameter is 66%, what are the two most important Fibonacci retracement levels? Two levels exist within this parameter, 38.2%, and 61.8%. Prices tend to retrace between these percentages before continuing the predominant trend. The 33-66% retracement parameter applies to short-term, intermediate-term, and long-term trends. Should you predicate your trading decisions solely on these levels? Of course not! However, by implementing retracement percentages, we can ascertain lower-risk trading opportunities, distinguish the strength of a trend, and classify a reversal.

To be fair, Fibonacci retracement percentages are a self-fulfilling prophecy. A natural tendency for market prices to follow the sequence is not substantiated. Benjamin Graham is often credited with saying “In the short run, the market is a voting machine”, and I believe he is correct. Traders consider the Fibonacci levels to be adequate entry or exit points; therefore, the percentages tend to function as levels of support or resistance. How do we interpret this? Honestly, who cares! Even if retracement percentages operate as a self-fulfilling prophecy, if it works, it works. If we can identify price areas/retracement levels where buying/selling is likely to increase, we should capitalize on it. The tool is advantageous uses outside of its self-fulfilling properties.

Exploiting Fibonacci retracement levels mechanically is a bit tough; the method is extremely subjective. Tradingview tried to do it with their Auto Fib Retracement tool. It fails miserably.

Take a look,

 

Not so great, huh?

The tool fails to account for the predominant trend (long-term), and draws fib levels for some bearish retracements during the uptrend. We aren’t going to achieve consistent profitability using the Fib tool to calculate retracement percentages for the retracement itself! We want to calculate retracement percentages for the actual trend. In addition, the tool calculates retracement percentages during phases of sideways movement. Sideways price movement is always bound between a major support and resistance level; there’s no trend in motion. Remember, Fibs are a trend retracement tool. No trend = no trend retracement. 

This isn’t the Tradingview’s fault. It’s just difficult to objectify something so inherently subjective.

Some analysts might consider the tool to be accurate in its automated form. This is largely due to there not being a standardized method of implementation. 

However, the astute retail trader implementing a discretionary system can benefit from using the Fib retracement tool. Why? Using the tool is more of an art than a science. There’s no consensus on proper implementation of the indicator – you really have to optimize it yourself. 

That said, I will discuss my interpretation of the indicator and how the method can be optimized as part of a discretionary system. 

To accurately draw the retracement levels, simply select your broker’s Fibonacci retracement tool. Select the highest-priced shadow before a downtrend begins, and then select the lowest shadow at the bottom of the current downtrend. This will display the retracement percentages for a downtrend. To determine the retracement percentages for an uptrend, simply reverse the sequence above. Plot your retracement tool at the lowest shadow before an uptrend and then select the highest shadow at the top of the uptrend. For these retracement levels to function correctly, the trend must be retracing, and you must be aware of the general trend. 

Before we look at illustrations, let’s discuss how the retracement tool is commonly employed incorrectly. Many traders use the tool incorrectly because they are unable to discern a short-term, intermediate-term, and long-term trend from one another. It should not be too difficult to distinguish between the three. We can’t use the tool to calculate retracement percentages for a short-term uptrend when selecting the lowest low and highest high of the long-term uptrend, which the short-term uptrend resides in. The resulting data will not be suitable. Reverse this for a downtrend. Also, many traders use the tool to calculate the retracement percentages of the actual retracement itself. This is not what we should do.

 

Figure 1.1 Using Fibonacci Retracement Tool for a Bullish Retracement

Fibonacci Retracements Downtrend

Fibonacci Retracements Downtrend

Figure 1.1 depicts how to use the retracement tool for a bullish retracement of the entire intermediate-term downtrend. We should narrow our start-point and end-point when calculating the percentages for short-term downtrends which progress the intermediate-term downtrend. We will expand on this in examples.

Figure 1.2 Using Fibonacci Retracement Tool for a Bearish Retracement

Fibonacci Retracements Uptrend

Figure 1.2 depicts how to use the Fibonacci retracement tool for a bearish retracement. We are using the retracement tool to calculate the bearish retracement percentages of the intermediate-term uptrend. See how the very last downward extension of the trend ends at the previous support point? Where it says, “This bearish retracement will be calculated for?” This is very important. That last extension is considered a short-term bearish reversal. We will cover why in the next figure. The short-term bearish reversal is also a bearish retracement of the intermediate-term uptrend. If we want to calculate the retracement percentages for the short-term uptrend preceding the “highest high before bearish retracement,” we should not do what is done in Figure 3.9. I know this sounds confusing. It will make much more sense in the next few examples.

The Fibonacci retracement tool used in the upcoming examples has been adjusted. I manually adjusted the indicator to account for 33%, thereby excluding 23.6%. In addition, the indicator calculates a 66% retracement instead of 78.6%. Therefore, my tool calculates 33, 38.2, 50, 61.8, and 66 percent.

Figure 1.3 Short-Term Uptrends Within Intermediate-Term Uptrend

Fibonacci Retracement Percentages

(NYSE: KR)

Figure 1.3 shows two short-term uptrends comprising an intermediate-term uptrend. Let’s see how we can properly use retracement percentages here.

Figure 1.4 Retracement Percentages of Short-Term Uptrend

Fibonacci Retracement Percentages

(NYSE:KR)

Figure 1.4 shows how to use the retracement tool to calculate retracement percentages for the short-term uptrend. Our start-point is the lowest low of the short-term uptrend and our end-point is the highest high of the short-term uptrend. We can see prices bearishly retraced 66% before continuing the uptrend. Traders are not eager to get in the trend by this metric. Buying intensity exceeds selling intensity; however, if we use the retracement tool in isolation, the current uptrend is nothing to write home about.

We can see that another short-term uptrend institutes after the bearish retracement. Therefore, the two short-term uptrends comprise an intermediate-term uptrend. How do we calculate the retracement percentages for the next short-term uptrend? Let’s start with what we shouldn’t do.

Figure 1.5 What We Shouldn’t Do

Fibonacci Retracement Percentages

(NYSE:KR)

Figure 1.5 shows how not to use the retracement tool to calculate percentages during the second short-term uptrend. We should not use the lowest low of the intermediate-term uptrend to calculate bearish retracement percentages for a short-term uptrend. We can see that prices did not extend into our retracement parameters when moving against the trend. Now, let’s look at what we should do.

 

Figure 1.6 What We Should Do

Fibonacci Retracement Percentages

(NYSE:KR)

Figure 1.6 shows exactly how to implement the retracement tool for the second short-term uptrend. The start point is the lowest low of the short-term uptrend that institutes after the bearish retracement of the first short-term uptrend. We can see prices retrace approximately 38.2%. Also, the session before the gap-up continuation of the uptrend results in a hammer. We know the significance of that. Candlestick formations and patterns, particularly on high volume, are strong signals when occurring within retracement parameters of a strong trend.

I am not a fan of indicators that try to forecast price areas where support or resistance might transpire. I prefer to capitalize on support/resistance levels that have already formed and are major. Trying to guess where support or resistance could form is arduous. However, retracement percentages are an exception. Far too many traders consider them important to the extent they actually become important.

Many skeptics denounce Fibonacci retracement percentages as a self-fulfilling prophecy. I praise them as a self-fulfilling prophecy. If we know traders are looking to buy the dip during a strong uptrend, and a large portion are looking to do so after a 33-50% retracement, we should use that information to our advantage. The increased demand will continue the uptrend. Vice versa for a strong downtrend. We shouldn’t let anyone convince us to not use something that works. As we know, market price fluctuations are contingent on supply and demand. If we can distinguish levels where demand considerably exceeds supply (support), or supply considerably exceeds demand (resistance), or even forecast potential price levels where one or the other may occur (retracement percentages), we are giving ourselves an edge.

We still have a lot to learn; however, retracements can be used to distinguish entry points into a strong trend in addition to evaluating the strength of that trend. We would greatly benefit from using a momentum indicator here, such as RSI or moving averages. 

At this time, the uptrend is gaining momentum. Let’s adjust the number of observable sessions to see how the trend progressed.

 

Figure 1.7 Uptrend Development

Fibonacci Retracement Percentages Long-Term Trend

(NYSE: KR)

Figure 1.7 shows the intermediate-term uptrend develops into a long-term uptrend. Be sure to pay special attention to the next sentence. All bearish retracements up until the “What Happened Here?” arrow should not have been calculated by using the lowest low (institution point) of the long-term uptrend. There was not a bearish retracement of the long-term uptrend. The long-term uptrend was in motion the entire time, up until “What Happened Here?” The intermediate-term downtrend in late 2013 to early 2014 was a bearish retracement of the long-term uptrend. How can we differentiate this? Let’s use the retracement tool on the short-term uptrend preceding the intermediate-term downtrend (bearish retracement) of the long-term uptrend.

Figure 1.8 Bearish Reversal of Short-Term Uptrend

Fibonacci Retracement Percentages Reversal

(NYSE:KR)

Figure 1.8 shows the retracement percentages for the short-term uptrend preceding the intermediate-term downtrend. There is some critical information to ascertain here. First, when the 66% retracement level is validly penetrated, whether a short-term, intermediate-term, or long-term trend, we should consider a complete reversal in motion. We should no longer consider prices to be retracing the trend. This does not mean a complete long-term reversal is going to occur.

Second, and most importantly, we must know how the bearish reversal of the short-term uptrend resides within the long-term uptrend. We can now use the retracement tool to calculate retracement percentages for the uptrend in its entirety (long-term), not just short-term uptrends.

Third, many traders improperly use the retracement tool when a sequence of prices similar to Figure 3.17 occurs. Many traders use the retracement tool to calculate percentages for the intermediate-term downtrend (bearish retracement) itself, going from the highest high to the lowest low. This is not entirely incorrect; money can be made by joining in the intermediate-term downtrend. However, this is a fallacious approach when failing to account for the retracement percentages of the long-term trend in motion.

Figure 1.9 Long-Term Uptrend Retracement

Fibonacci Retracement Percentages Major Trend

(NYSE: KR)

Figure 1.9 shows us finally using the institution point of the long-term uptrend to calculate retracement percentages. The bearish reversal was a 38.2% bearish retracement of the long-term uptrend. This is why a macro to micro approach is a prerequisite to trading a security. The last thing we want to do is go short during the bearish retracement when prices are near a prominent retracement percentage of the long-term uptrend. We won’t do this if we know the downtrend might be a retracement of a much stronger uptrend in motion.

Prices bearishly retrace the long-term uptrend 38.2%; therefore, we should conclude the long-term uptrend is strong and in motion. Valid penetration is applicable with retracement percentages. If the retracement level is validly penetrated, particularly 66%, we can always cut our losses short and look for another entry-point later if the trend continues. No position should be opened in the absence of a trading strategy.

Retracement percentages offer precise areas where buying the dip of a strong trend is optimal. Remember, a trend in motion consistently retracing 33%-38.2% at most is generally strong. A trend in motion consistently retracing 50% is healthy and sustainable. A trend consistently retracing 66% can still be traded in favor of. We just have to be cautious of potential exhaustion when the trend continues. We can look at retracements of 33%-66% as an opportunity to buy the dip if additional indications are present. This strategy works extremely well in conjunction with RSI analysis and a simple moving average.

Let’s say stock XYZ is experiencing a strong uptrend. The uptrend has caused stock XYZ to reach a relatively high price per share and those who account for fundamentals and theory (where prices should be) consider XYZ to be “overvalued.” When prices institute a move against the uptrend (bearish retracement), some theorists might claim “The uptrend is finally over! This is the top! XYZ is overvalued!” Let’s say prices bearishly retrace 33% before continuing the predominant uptrend. Despite any theory or acquaintance sentiment, we can conclude the uptrend is strong and in motion. Traders of stock XYZ considered the 33% retracement as an adequate opportunity to buy the dip. Let’s see how the trend progresses.

Figure 1.10 Long-Term Uptrend Strong Momentum

Uptrend

(NYSE: KR)

Figure 1.10 shows the uptrend is strong and remains in motion after the 38.2% bearish retracement.

Figure 1.11 Fibonacci Retracement in an Uptrend (1)

How to Use Finbonacci Retracements

(NASDAQ: GOOG)

Figure 1.11 shows a proper implementation of the Fibonacci retracement tool in an uptrend. Prices bearishly retrace the uptrend in October, buying intensity increases around the 38.2% level; the uptrend continues. Notice the dragonfly doji formation during the retracement. The intrasession low price (lower wick) occurred around 38.2% and increased demand closed prices higher. In the absence of complementary indicators, we can interpret this as bullish. For those of you not backtesting your strategies, analyzing candlestick formations and patterns, in addition to volume, at Fibonacci retracement percentages is an adequate constituent of a trading strategy.

Prices continue uptrending, and a large price decline transpires in early 2018. Let’s adjust our Fibonacci retracement endpoint to distinguish price levels that correlate with the retracement percentage parameters.

Figure 1.12 Fibonacci Retracement in a Downtrend (3)

Fibonacci

(NASDAQ: GOOG)

Figure 1.12 shows our adjusted endpoint. The long-term uptrend has lost momentum. Prices gap down and decline until demand exceeds supply at the 66% retracement level. This level is not validly penetrated and prices increase thereafter.

Assuming you are long in the uptrend, you can use the Fibonacci retracement tool to discern between a retracement and a reversal. If prices simply retrace and your exit-strategy criteria are not fulfilled, you can sustain a position in favor of the trend. That being said, the expeditious sell-off is considered a bearish reversal of the short-term uptrend preceding the sell-off. This same sell-off is considered a bearish retracement of the intermediate-term uptrend in its entirety. Again, we do not want to go short when the 66% retracement level of the intermediate-term uptrend is tested. The possibility of increased demand is just too great; risk transcends reward. If prices validly penetrate the 66% retracement level, we should consider a bearish reversal of the intermediate-term uptrend in motion, and possibly distinguish entry-points into the downtrend if it is strong.

Figure 1.13 Support and Resistance with Fibonacci Retracement %

COVID Crash (NYSEARCA: SPY)

Figure 1.13 shows the bullish reversal of the COVID-19 crash. This bullish reversal had a large portion of retail investors baffled, particularly the theorists. We can see valid penetration of the 66% retracement level. Applying what’s been covered up until now, we can consider a complete bullish reversal in motion when the 66% retracement level is validly penetrated. 

Key Takeaways

  • Fibs can work when used with in their scope. 
  • A Fibonacci system/strategy is difficult to objectify.
  • The methodology is only as good as the trader applying it – as with any discretionary system.
  • Even if Fibs didn’t function as a self-fulfilling prophecy: they can still be used to distinguish good price areas to “buy the dip”.

Try to objectify your trading! 

Join our Discord server! We will help you build a mechanical trading system and backtest it! We will send you the code; you can backtest the system on ANY stock at ANY time!

https://discord.gg/usksugbr2H

The servers getting a bit large.

Make sure to join before we are forced to close off access for a bit!

Courses Archive – Kioseff Trading

Check out our Youtube Channel for trading systems with code access! (You can backtest the systems at any time AND set alerts)

Kioseff Trading – YouTube

-Kioseff Trading 

Legal Disclaimer: The information contained in the article is not intended as, and shall not be understood or construed as, financial advice. The author is  not an attorney, accountant, or financial advisor, nor are they holding themselves out to be, and the information contained in this article is not a substitute for a professional who is aware of the circumstances and facts of your personal financial situation. 

The author does not have a position for the discussed securities and does not plan to open a position for the discussed securities. 

Losses can exceed investment. Any stock mentioned throughout the article does not constitute advice or a recommendation. Any losses incurred that are due to error, accident, malfunction, or any loss due to any reason is not the legal responsibility or fault of the author. 

The article reflects an expressed opinion from the author. 

© Kioseff Trading. All rights reserved. No portion of this article, or any content on the website, may be redistributed or passed as one’s own without express permission from the author.

Fibonacci Retracement Percentages

Leonardo Fibonacci founded Fibonacci numbers and the Fibonacci sequence. They are numbers that are found to exist as part of a sequence that occurs in nature. Traders tend to open and close positions at these retracement percentages, so great significance is placed on them. 0, 23.6, 38.2, 61.8, and 78.6, are the primary Fibonacci retracement percentages used for trading. The Fibonacci retracement levels do extend beyond 100, so be aware of that. Also, 50% and 100% are not Fibonacci retracement percentages, but these levels are consequential enough to include as part of your analysis. 

We have a defined percentage parameter in which a trend frequently retraces before continuing. Because the minimum percentage of this parameter is 33%, and the maximum percentage of this parameter is 66%, what are the two most important Fibonacci retracement levels? Two levels exist within this parameter, 38.2%, and 61.8%. Prices tend to retrace between these percentages before continuing the predominant trend. The 33-66% retracement parameter applies to short-term, intermediate-term, and long-term trends. Should you predicate your trading decisions solely on these levels? Of course not! However, by implementing retracement percentages, we can ascertain lower-risk trading opportunities, distinguish the strength of a trend, and classify a reversal.

To be fair, Fibonacci retracement percentages are a self-fulfilling prophecy. A natural tendency for market prices to follow the sequence is not substantiated. Benjamin Graham is often credited with saying “In the short run, the market is a voting machine”, and I believe he is correct. Traders consider the Fibonacci levels to be adequate entry or exit points; therefore, the percentages tend to function as levels of support or resistance. How do we interpret this? Honestly, who cares! Even if retracement percentages operate as a self-fulfilling prophecy, if it works, it works. If we can identify price areas/retracement levels where buying/selling is likely to increase, we should capitalize on it. The tool is advantageous uses outside of its self-fulfilling properties.

Exploiting Fibonacci retracement levels mechanically is a bit tough; the method is extremely subjective. Tradingview tried to do it with their Auto Fib Retracement tool. It fails miserably.

Take a look,

 

Not so great, huh?

The tool fails to account for the predominant trend (long-term), and draws fib levels for some bearish retracements during the uptrend. We aren’t going to achieve consistent profitability using the Fib tool to calculate retracement percentages for the retracement itself! We want to calculate retracement percentages for the actual trend. In addition, the tool calculates retracement percentages during phases of sideways movement. Sideways price movement is always bound between a major support and resistance level; there’s no trend in motion. Remember, Fibs are a trend retracement tool. No trend = no trend retracement. 

This isn’t the Tradingview’s fault. It’s just difficult to objectify something so inherently subjective.

Some analysts might consider the tool to be accurate in its automated form. This is largely due to there not being a standardized method of implementation. 

However, the astute retail trader implementing a discretionary system can benefit from using the Fib retracement tool. Why? Using the tool is more of an art than a science. There’s no consensus on proper implementation of the indicator – you really have to optimize it yourself. 

That said, I will discuss my interpretation of the indicator and how the method can be optimized as part of a discretionary system. 

To accurately draw the retracement levels, simply select your broker’s Fibonacci retracement tool. Select the highest-priced shadow before a downtrend begins, and then select the lowest shadow at the bottom of the current downtrend. This will display the retracement percentages for a downtrend. To determine the retracement percentages for an uptrend, simply reverse the sequence above. Plot your retracement tool at the lowest shadow before an uptrend and then select the highest shadow at the top of the uptrend. For these retracement levels to function correctly, the trend must be retracing, and you must be aware of the general trend. 

Before we look at illustrations, let’s discuss how the retracement tool is commonly employed incorrectly. Many traders use the tool incorrectly because they are unable to discern a short-term, intermediate-term, and long-term trend from one another. It should not be too difficult to distinguish between the three. We can’t use the tool to calculate retracement percentages for a short-term uptrend when selecting the lowest low and highest high of the long-term uptrend, which the short-term uptrend resides in. The resulting data will not be suitable. Reverse this for a downtrend. Also, many traders use the tool to calculate the retracement percentages of the actual retracement itself. This is not what we should do.

 

Figure 1.1 Using Fibonacci Retracement Tool for a Bullish Retracement

Fibonacci Retracements Downtrend

Fibonacci Retracements Downtrend

Figure 1.1 depicts how to use the retracement tool for a bullish retracement of the entire intermediate-term downtrend. We should narrow our start-point and end-point when calculating the percentages for short-term downtrends which progress the intermediate-term downtrend. We will expand on this in examples.

Figure 1.2 Using Fibonacci Retracement Tool for a Bearish Retracement

Fibonacci Retracements Uptrend

Figure 1.2 depicts how to use the Fibonacci retracement tool for a bearish retracement. We are using the retracement tool to calculate the bearish retracement percentages of the intermediate-term uptrend. See how the very last downward extension of the trend ends at the previous support point? Where it says, “This bearish retracement will be calculated for?” This is very important. That last extension is considered a short-term bearish reversal. We will cover why in the next figure. The short-term bearish reversal is also a bearish retracement of the intermediate-term uptrend. If we want to calculate the retracement percentages for the short-term uptrend preceding the “highest high before bearish retracement,” we should not do what is done in Figure 3.9. I know this sounds confusing. It will make much more sense in the next few examples.

The Fibonacci retracement tool used in the upcoming examples has been adjusted. I manually adjusted the indicator to account for 33%, thereby excluding 23.6%. In addition, the indicator calculates a 66% retracement instead of 78.6%. Therefore, my tool calculates 33, 38.2, 50, 61.8, and 66 percent.

Figure 1.3 Short-Term Uptrends Within Intermediate-Term Uptrend

Fibonacci Retracement Percentages

(NYSE: KR)

Figure 1.3 shows two short-term uptrends comprising an intermediate-term uptrend. Let’s see how we can properly use retracement percentages here.

Figure 1.4 Retracement Percentages of Short-Term Uptrend

Fibonacci Retracement Percentages

(NYSE:KR)

Figure 1.4 shows how to use the retracement tool to calculate retracement percentages for the short-term uptrend. Our start-point is the lowest low of the short-term uptrend and our end-point is the highest high of the short-term uptrend. We can see prices bearishly retraced 66% before continuing the uptrend. Traders are not eager to get in the trend by this metric. Buying intensity exceeds selling intensity; however, if we use the retracement tool in isolation, the current uptrend is nothing to write home about.

We can see that another short-term uptrend institutes after the bearish retracement. Therefore, the two short-term uptrends comprise an intermediate-term uptrend. How do we calculate the retracement percentages for the next short-term uptrend? Let’s start with what we shouldn’t do.

Figure 1.5 What We Shouldn’t Do

Fibonacci Retracement Percentages

(NYSE:KR)

Figure 1.5 shows how not to use the retracement tool to calculate percentages during the second short-term uptrend. We should not use the lowest low of the intermediate-term uptrend to calculate bearish retracement percentages for a short-term uptrend. We can see that prices did not extend into our retracement parameters when moving against the trend. Now, let’s look at what we should do.

 

Figure 1.6 What We Should Do

Fibonacci Retracement Percentages

(NYSE:KR)

Figure 1.6 shows exactly how to implement the retracement tool for the second short-term uptrend. The start point is the lowest low of the short-term uptrend that institutes after the bearish retracement of the first short-term uptrend. We can see prices retrace approximately 38.2%. Also, the session before the gap-up continuation of the uptrend results in a hammer. We know the significance of that. Candlestick formations and patterns, particularly on high volume, are strong signals when occurring within retracement parameters of a strong trend.

I am not a fan of indicators that try to forecast price areas where support or resistance might transpire. I prefer to capitalize on support/resistance levels that have already formed and are major. Trying to guess where support or resistance could form is arduous. However, retracement percentages are an exception. Far too many traders consider them important to the extent they actually become important.

Many skeptics denounce Fibonacci retracement percentages as a self-fulfilling prophecy. I praise them as a self-fulfilling prophecy. If we know traders are looking to buy the dip during a strong uptrend, and a large portion are looking to do so after a 33-50% retracement, we should use that information to our advantage. The increased demand will continue the uptrend. Vice versa for a strong downtrend. We shouldn’t let anyone convince us to not use something that works. As we know, market price fluctuations are contingent on supply and demand. If we can distinguish levels where demand considerably exceeds supply (support), or supply considerably exceeds demand (resistance), or even forecast potential price levels where one or the other may occur (retracement percentages), we are giving ourselves an edge.

We still have a lot to learn; however, retracements can be used to distinguish entry points into a strong trend in addition to evaluating the strength of that trend. We would greatly benefit from using a momentum indicator here, such as RSI or moving averages. 

At this time, the uptrend is gaining momentum. Let’s adjust the number of observable sessions to see how the trend progressed.

 

Figure 1.7 Uptrend Development

Fibonacci Retracement Percentages Long-Term Trend

(NYSE: KR)

Figure 1.7 shows the intermediate-term uptrend develops into a long-term uptrend. Be sure to pay special attention to the next sentence. All bearish retracements up until the “What Happened Here?” arrow should not have been calculated by using the lowest low (institution point) of the long-term uptrend. There was not a bearish retracement of the long-term uptrend. The long-term uptrend was in motion the entire time, up until “What Happened Here?” The intermediate-term downtrend in late 2013 to early 2014 was a bearish retracement of the long-term uptrend. How can we differentiate this? Let’s use the retracement tool on the short-term uptrend preceding the intermediate-term downtrend (bearish retracement) of the long-term uptrend.

Figure 1.8 Bearish Reversal of Short-Term Uptrend

Fibonacci Retracement Percentages Reversal

(NYSE:KR)

Figure 1.8 shows the retracement percentages for the short-term uptrend preceding the intermediate-term downtrend. There is some critical information to ascertain here. First, when the 66% retracement level is validly penetrated, whether a short-term, intermediate-term, or long-term trend, we should consider a complete reversal in motion. We should no longer consider prices to be retracing the trend. This does not mean a complete long-term reversal is going to occur.

Second, and most importantly, we must know how the bearish reversal of the short-term uptrend resides within the long-term uptrend. We can now use the retracement tool to calculate retracement percentages for the uptrend in its entirety (long-term), not just short-term uptrends.

Third, many traders improperly use the retracement tool when a sequence of prices similar to Figure 3.17 occurs. Many traders use the retracement tool to calculate percentages for the intermediate-term downtrend (bearish retracement) itself, going from the highest high to the lowest low. This is not entirely incorrect; money can be made by joining in the intermediate-term downtrend. However, this is a fallacious approach when failing to account for the retracement percentages of the long-term trend in motion.

Figure 1.9 Long-Term Uptrend Retracement

Fibonacci Retracement Percentages Major Trend

(NYSE: KR)

Figure 1.9 shows us finally using the institution point of the long-term uptrend to calculate retracement percentages. The bearish reversal was a 38.2% bearish retracement of the long-term uptrend. This is why a macro to micro approach is a prerequisite to trading a security. The last thing we want to do is go short during the bearish retracement when prices are near a prominent retracement percentage of the long-term uptrend. We won’t do this if we know the downtrend might be a retracement of a much stronger uptrend in motion.

Prices bearishly retrace the long-term uptrend 38.2%; therefore, we should conclude the long-term uptrend is strong and in motion. Valid penetration is applicable with retracement percentages. If the retracement level is validly penetrated, particularly 66%, we can always cut our losses short and look for another entry-point later if the trend continues. No position should be opened in the absence of a trading strategy.

Retracement percentages offer precise areas where buying the dip of a strong trend is optimal. Remember, a trend in motion consistently retracing 33%-38.2% at most is generally strong. A trend in motion consistently retracing 50% is healthy and sustainable. A trend consistently retracing 66% can still be traded in favor of. We just have to be cautious of potential exhaustion when the trend continues. We can look at retracements of 33%-66% as an opportunity to buy the dip if additional indications are present. This strategy works extremely well in conjunction with RSI analysis and a simple moving average.

Let’s say stock XYZ is experiencing a strong uptrend. The uptrend has caused stock XYZ to reach a relatively high price per share and those who account for fundamentals and theory (where prices should be) consider XYZ to be “overvalued.” When prices institute a move against the uptrend (bearish retracement), some theorists might claim “The uptrend is finally over! This is the top! XYZ is overvalued!” Let’s say prices bearishly retrace 33% before continuing the predominant uptrend. Despite any theory or acquaintance sentiment, we can conclude the uptrend is strong and in motion. Traders of stock XYZ considered the 33% retracement as an adequate opportunity to buy the dip. Let’s see how the trend progresses.

Figure 1.10 Long-Term Uptrend Strong Momentum

Uptrend

(NYSE: KR)

Figure 1.10 shows the uptrend is strong and remains in motion after the 38.2% bearish retracement.

Figure 1.11 Fibonacci Retracement in an Uptrend (1)

How to Use Finbonacci Retracements

(NASDAQ: GOOG)

Figure 1.11 shows a proper implementation of the Fibonacci retracement tool in an uptrend. Prices bearishly retrace the uptrend in October, buying intensity increases around the 38.2% level; the uptrend continues. Notice the dragonfly doji formation during the retracement. The intrasession low price (lower wick) occurred around 38.2% and increased demand closed prices higher. In the absence of complementary indicators, we can interpret this as bullish. For those of you not backtesting your strategies, analyzing candlestick formations and patterns, in addition to volume, at Fibonacci retracement percentages is an adequate constituent of a trading strategy.

Prices continue uptrending, and a large price decline transpires in early 2018. Let’s adjust our Fibonacci retracement endpoint to distinguish price levels that correlate with the retracement percentage parameters.

Figure 1.12 Fibonacci Retracement in a Downtrend (3)

Fibonacci

(NASDAQ: GOOG)

Figure 1.12 shows our adjusted endpoint. The long-term uptrend has lost momentum. Prices gap down and decline until demand exceeds supply at the 66% retracement level. This level is not validly penetrated and prices increase thereafter.

Assuming you are long in the uptrend, you can use the Fibonacci retracement tool to discern between a retracement and a reversal. If prices simply retrace and your exit-strategy criteria are not fulfilled, you can sustain a position in favor of the trend. That being said, the expeditious sell-off is considered a bearish reversal of the short-term uptrend preceding the sell-off. This same sell-off is considered a bearish retracement of the intermediate-term uptrend in its entirety. Again, we do not want to go short when the 66% retracement level of the intermediate-term uptrend is tested. The possibility of increased demand is just too great; risk transcends reward. If prices validly penetrate the 66% retracement level, we should consider a bearish reversal of the intermediate-term uptrend in motion, and possibly distinguish entry-points into the downtrend if it is strong.

Figure 1.13 Support and Resistance with Fibonacci Retracement %

COVID Crash (NYSEARCA: SPY)

Figure 1.13 shows the bullish reversal of the COVID-19 crash. This bullish reversal had a large portion of retail investors baffled, particularly the theorists. We can see valid penetration of the 66% retracement level. Applying what’s been covered up until now, we can consider a complete bullish reversal in motion when the 66% retracement level is validly penetrated. 

Key Takeaways

  • Fibs can work when used with in their scope. 
  • A Fibonacci system/strategy is difficult to objectify.
  • The methodology is only as good as the trader applying it – as with any discretionary system.
  • Even if Fibs didn’t function as a self-fulfilling prophecy: they can still be used to distinguish good price areas to “buy the dip”.

Try to objectify your trading! 

Join our Discord server! We will help you build a mechanical trading system and backtest it! We will send you the code; you can backtest the system on ANY stock at ANY time!

https://discord.gg/usksugbr2H

The servers getting a bit large.

Make sure to join before we are forced to close off access for a bit!

Courses Archive – Kioseff Trading

Check out our Youtube Channel for trading systems with code access! (You can backtest the systems at any time AND set alerts)

Kioseff Trading – YouTube

-Kioseff Trading 

Legal Disclaimer: The information contained in the article is not intended as, and shall not be understood or construed as, financial advice. The author is  not an attorney, accountant, or financial advisor, nor are they holding themselves out to be, and the information contained in this article is not a substitute for a professional who is aware of the circumstances and facts of your personal financial situation. 

The author does not have a position for the discussed securities and does not plan to open a position for the discussed securities. 

Losses can exceed investment. Any stock mentioned throughout the article does not constitute advice or a recommendation. Any losses incurred that are due to error, accident, malfunction, or any loss due to any reason is not the legal responsibility or fault of the author. 

The article reflects an expressed opinion from the author. 

© Kioseff Trading. All rights reserved. No portion of this article, or any content on the website, may be redistributed or passed as one’s own without express permission from the author.

Fibonacci Retracement Percentages

Leonardo Fibonacci founded Fibonacci numbers and the Fibonacci sequence. They are numbers that are found to exist as part of a sequence that occurs in nature. Traders tend to open and close positions at these retracement percentages, so great significance is placed on them. 0, 23.6, 38.2, 61.8, and 78.6, are the primary Fibonacci retracement percentages used for trading. The Fibonacci retracement levels do extend beyond 100, so be aware of that. Also, 50% and 100% are not Fibonacci retracement percentages, but these levels are consequential enough to include as part of your analysis. 

We have a defined percentage parameter in which a trend frequently retraces before continuing. Because the minimum percentage of this parameter is 33%, and the maximum percentage of this parameter is 66%, what are the two most important Fibonacci retracement levels? Two levels exist within this parameter, 38.2%, and 61.8%. Prices tend to retrace between these percentages before continuing the predominant trend. The 33-66% retracement parameter applies to short-term, intermediate-term, and long-term trends. Should you predicate your trading decisions solely on these levels? Of course not! However, by implementing retracement percentages, we can ascertain lower-risk trading opportunities, distinguish the strength of a trend, and classify a reversal.

To be fair, Fibonacci retracement percentages are a self-fulfilling prophecy. A natural tendency for market prices to follow the sequence is not substantiated. Benjamin Graham is often credited with saying “In the short run, the market is a voting machine”, and I believe he is correct. Traders consider the Fibonacci levels to be adequate entry or exit points; therefore, the percentages tend to function as levels of support or resistance. How do we interpret this? Honestly, who cares! Even if retracement percentages operate as a self-fulfilling prophecy, if it works, it works. If we can identify price areas/retracement levels where buying/selling is likely to increase, we should capitalize on it. The tool is advantageous uses outside of its self-fulfilling properties.

Exploiting Fibonacci retracement levels mechanically is a bit tough; the method is extremely subjective. Tradingview tried to do it with their Auto Fib Retracement tool. It fails miserably.

Take a look,

 

Not so great, huh?

The tool fails to account for the predominant trend (long-term), and draws fib levels for some bearish retracements during the uptrend. We aren’t going to achieve consistent profitability using the Fib tool to calculate retracement percentages for the retracement itself! We want to calculate retracement percentages for the actual trend. In addition, the tool calculates retracement percentages during phases of sideways movement. Sideways price movement is always bound between a major support and resistance level; there’s no trend in motion. Remember, Fibs are a trend retracement tool. No trend = no trend retracement. 

This isn’t the Tradingview’s fault. It’s just difficult to objectify something so inherently subjective.

Some analysts might consider the tool to be accurate in its automated form. This is largely due to there not being a standardized method of implementation. 

However, the astute retail trader implementing a discretionary system can benefit from using the Fib retracement tool. Why? Using the tool is more of an art than a science. There’s no consensus on proper implementation of the indicator – you really have to optimize it yourself. 

That said, I will discuss my interpretation of the indicator and how the method can be optimized as part of a discretionary system. 

To accurately draw the retracement levels, simply select your broker’s Fibonacci retracement tool. Select the highest-priced shadow before a downtrend begins, and then select the lowest shadow at the bottom of the current downtrend. This will display the retracement percentages for a downtrend. To determine the retracement percentages for an uptrend, simply reverse the sequence above. Plot your retracement tool at the lowest shadow before an uptrend and then select the highest shadow at the top of the uptrend. For these retracement levels to function correctly, the trend must be retracing, and you must be aware of the general trend. 

Before we look at illustrations, let’s discuss how the retracement tool is commonly employed incorrectly. Many traders use the tool incorrectly because they are unable to discern a short-term, intermediate-term, and long-term trend from one another. It should not be too difficult to distinguish between the three. We can’t use the tool to calculate retracement percentages for a short-term uptrend when selecting the lowest low and highest high of the long-term uptrend, which the short-term uptrend resides in. The resulting data will not be suitable. Reverse this for a downtrend. Also, many traders use the tool to calculate the retracement percentages of the actual retracement itself. This is not what we should do.

 

Figure 1.1 Using Fibonacci Retracement Tool for a Bullish Retracement

Fibonacci Retracements Downtrend

Fibonacci Retracements Downtrend

Figure 1.1 depicts how to use the retracement tool for a bullish retracement of the entire intermediate-term downtrend. We should narrow our start-point and end-point when calculating the percentages for short-term downtrends which progress the intermediate-term downtrend. We will expand on this in examples.

Figure 1.2 Using Fibonacci Retracement Tool for a Bearish Retracement

Fibonacci Retracements Uptrend

Figure 1.2 depicts how to use the Fibonacci retracement tool for a bearish retracement. We are using the retracement tool to calculate the bearish retracement percentages of the intermediate-term uptrend. See how the very last downward extension of the trend ends at the previous support point? Where it says, “This bearish retracement will be calculated for?” This is very important. That last extension is considered a short-term bearish reversal. We will cover why in the next figure. The short-term bearish reversal is also a bearish retracement of the intermediate-term uptrend. If we want to calculate the retracement percentages for the short-term uptrend preceding the “highest high before bearish retracement,” we should not do what is done in Figure 3.9. I know this sounds confusing. It will make much more sense in the next few examples.

The Fibonacci retracement tool used in the upcoming examples has been adjusted. I manually adjusted the indicator to account for 33%, thereby excluding 23.6%. In addition, the indicator calculates a 66% retracement instead of 78.6%. Therefore, my tool calculates 33, 38.2, 50, 61.8, and 66 percent.

Figure 1.3 Short-Term Uptrends Within Intermediate-Term Uptrend

Fibonacci Retracement Percentages

(NYSE: KR)

Figure 1.3 shows two short-term uptrends comprising an intermediate-term uptrend. Let’s see how we can properly use retracement percentages here.

Figure 1.4 Retracement Percentages of Short-Term Uptrend

Fibonacci Retracement Percentages

(NYSE:KR)

Figure 1.4 shows how to use the retracement tool to calculate retracement percentages for the short-term uptrend. Our start-point is the lowest low of the short-term uptrend and our end-point is the highest high of the short-term uptrend. We can see prices bearishly retraced 66% before continuing the uptrend. Traders are not eager to get in the trend by this metric. Buying intensity exceeds selling intensity; however, if we use the retracement tool in isolation, the current uptrend is nothing to write home about.

We can see that another short-term uptrend institutes after the bearish retracement. Therefore, the two short-term uptrends comprise an intermediate-term uptrend. How do we calculate the retracement percentages for the next short-term uptrend? Let’s start with what we shouldn’t do.

Figure 1.5 What We Shouldn’t Do

Fibonacci Retracement Percentages

(NYSE:KR)

Figure 1.5 shows how not to use the retracement tool to calculate percentages during the second short-term uptrend. We should not use the lowest low of the intermediate-term uptrend to calculate bearish retracement percentages for a short-term uptrend. We can see that prices did not extend into our retracement parameters when moving against the trend. Now, let’s look at what we should do.

 

Figure 1.6 What We Should Do

Fibonacci Retracement Percentages

(NYSE:KR)

Figure 1.6 shows exactly how to implement the retracement tool for the second short-term uptrend. The start point is the lowest low of the short-term uptrend that institutes after the bearish retracement of the first short-term uptrend. We can see prices retrace approximately 38.2%. Also, the session before the gap-up continuation of the uptrend results in a hammer. We know the significance of that. Candlestick formations and patterns, particularly on high volume, are strong signals when occurring within retracement parameters of a strong trend.

I am not a fan of indicators that try to forecast price areas where support or resistance might transpire. I prefer to capitalize on support/resistance levels that have already formed and are major. Trying to guess where support or resistance could form is arduous. However, retracement percentages are an exception. Far too many traders consider them important to the extent they actually become important.

Many skeptics denounce Fibonacci retracement percentages as a self-fulfilling prophecy. I praise them as a self-fulfilling prophecy. If we know traders are looking to buy the dip during a strong uptrend, and a large portion are looking to do so after a 33-50% retracement, we should use that information to our advantage. The increased demand will continue the uptrend. Vice versa for a strong downtrend. We shouldn’t let anyone convince us to not use something that works. As we know, market price fluctuations are contingent on supply and demand. If we can distinguish levels where demand considerably exceeds supply (support), or supply considerably exceeds demand (resistance), or even forecast potential price levels where one or the other may occur (retracement percentages), we are giving ourselves an edge.

We still have a lot to learn; however, retracements can be used to distinguish entry points into a strong trend in addition to evaluating the strength of that trend. We would greatly benefit from using a momentum indicator here, such as RSI or moving averages. 

At this time, the uptrend is gaining momentum. Let’s adjust the number of observable sessions to see how the trend progressed.

 

Figure 1.7 Uptrend Development

Fibonacci Retracement Percentages Long-Term Trend

(NYSE: KR)

Figure 1.7 shows the intermediate-term uptrend develops into a long-term uptrend. Be sure to pay special attention to the next sentence. All bearish retracements up until the “What Happened Here?” arrow should not have been calculated by using the lowest low (institution point) of the long-term uptrend. There was not a bearish retracement of the long-term uptrend. The long-term uptrend was in motion the entire time, up until “What Happened Here?” The intermediate-term downtrend in late 2013 to early 2014 was a bearish retracement of the long-term uptrend. How can we differentiate this? Let’s use the retracement tool on the short-term uptrend preceding the intermediate-term downtrend (bearish retracement) of the long-term uptrend.

Figure 1.8 Bearish Reversal of Short-Term Uptrend

Fibonacci Retracement Percentages Reversal

(NYSE:KR)

Figure 1.8 shows the retracement percentages for the short-term uptrend preceding the intermediate-term downtrend. There is some critical information to ascertain here. First, when the 66% retracement level is validly penetrated, whether a short-term, intermediate-term, or long-term trend, we should consider a complete reversal in motion. We should no longer consider prices to be retracing the trend. This does not mean a complete long-term reversal is going to occur.

Second, and most importantly, we must know how the bearish reversal of the short-term uptrend resides within the long-term uptrend. We can now use the retracement tool to calculate retracement percentages for the uptrend in its entirety (long-term), not just short-term uptrends.

Third, many traders improperly use the retracement tool when a sequence of prices similar to Figure 3.17 occurs. Many traders use the retracement tool to calculate percentages for the intermediate-term downtrend (bearish retracement) itself, going from the highest high to the lowest low. This is not entirely incorrect; money can be made by joining in the intermediate-term downtrend. However, this is a fallacious approach when failing to account for the retracement percentages of the long-term trend in motion.

Figure 1.9 Long-Term Uptrend Retracement

Fibonacci Retracement Percentages Major Trend

(NYSE: KR)

Figure 1.9 shows us finally using the institution point of the long-term uptrend to calculate retracement percentages. The bearish reversal was a 38.2% bearish retracement of the long-term uptrend. This is why a macro to micro approach is a prerequisite to trading a security. The last thing we want to do is go short during the bearish retracement when prices are near a prominent retracement percentage of the long-term uptrend. We won’t do this if we know the downtrend might be a retracement of a much stronger uptrend in motion.

Prices bearishly retrace the long-term uptrend 38.2%; therefore, we should conclude the long-term uptrend is strong and in motion. Valid penetration is applicable with retracement percentages. If the retracement level is validly penetrated, particularly 66%, we can always cut our losses short and look for another entry-point later if the trend continues. No position should be opened in the absence of a trading strategy.

Retracement percentages offer precise areas where buying the dip of a strong trend is optimal. Remember, a trend in motion consistently retracing 33%-38.2% at most is generally strong. A trend in motion consistently retracing 50% is healthy and sustainable. A trend consistently retracing 66% can still be traded in favor of. We just have to be cautious of potential exhaustion when the trend continues. We can look at retracements of 33%-66% as an opportunity to buy the dip if additional indications are present. This strategy works extremely well in conjunction with RSI analysis and a simple moving average.

Let’s say stock XYZ is experiencing a strong uptrend. The uptrend has caused stock XYZ to reach a relatively high price per share and those who account for fundamentals and theory (where prices should be) consider XYZ to be “overvalued.” When prices institute a move against the uptrend (bearish retracement), some theorists might claim “The uptrend is finally over! This is the top! XYZ is overvalued!” Let’s say prices bearishly retrace 33% before continuing the predominant uptrend. Despite any theory or acquaintance sentiment, we can conclude the uptrend is strong and in motion. Traders of stock XYZ considered the 33% retracement as an adequate opportunity to buy the dip. Let’s see how the trend progresses.

Figure 1.10 Long-Term Uptrend Strong Momentum

Uptrend

(NYSE: KR)

Figure 1.10 shows the uptrend is strong and remains in motion after the 38.2% bearish retracement.

Figure 1.11 Fibonacci Retracement in an Uptrend (1)

How to Use Finbonacci Retracements

(NASDAQ: GOOG)

Figure 1.11 shows a proper implementation of the Fibonacci retracement tool in an uptrend. Prices bearishly retrace the uptrend in October, buying intensity increases around the 38.2% level; the uptrend continues. Notice the dragonfly doji formation during the retracement. The intrasession low price (lower wick) occurred around 38.2% and increased demand closed prices higher. In the absence of complementary indicators, we can interpret this as bullish. For those of you not backtesting your strategies, analyzing candlestick formations and patterns, in addition to volume, at Fibonacci retracement percentages is an adequate constituent of a trading strategy.

Prices continue uptrending, and a large price decline transpires in early 2018. Let’s adjust our Fibonacci retracement endpoint to distinguish price levels that correlate with the retracement percentage parameters.

Figure 1.12 Fibonacci Retracement in a Downtrend (3)

Fibonacci

(NASDAQ: GOOG)

Figure 1.12 shows our adjusted endpoint. The long-term uptrend has lost momentum. Prices gap down and decline until demand exceeds supply at the 66% retracement level. This level is not validly penetrated and prices increase thereafter.

Assuming you are long in the uptrend, you can use the Fibonacci retracement tool to discern between a retracement and a reversal. If prices simply retrace and your exit-strategy criteria are not fulfilled, you can sustain a position in favor of the trend. That being said, the expeditious sell-off is considered a bearish reversal of the short-term uptrend preceding the sell-off. This same sell-off is considered a bearish retracement of the intermediate-term uptrend in its entirety. Again, we do not want to go short when the 66% retracement level of the intermediate-term uptrend is tested. The possibility of increased demand is just too great; risk transcends reward. If prices validly penetrate the 66% retracement level, we should consider a bearish reversal of the intermediate-term uptrend in motion, and possibly distinguish entry-points into the downtrend if it is strong.

Figure 1.13 Support and Resistance with Fibonacci Retracement %

COVID Crash (NYSEARCA: SPY)

Figure 1.13 shows the bullish reversal of the COVID-19 crash. This bullish reversal had a large portion of retail investors baffled, particularly the theorists. We can see valid penetration of the 66% retracement level. Applying what’s been covered up until now, we can consider a complete bullish reversal in motion when the 66% retracement level is validly penetrated. 

Key Takeaways

  • Fibs can work when used with in their scope. 
  • A Fibonacci system/strategy is difficult to objectify.
  • The methodology is only as good as the trader applying it – as with any discretionary system.
  • Even if Fibs didn’t function as a self-fulfilling prophecy: they can still be used to distinguish good price areas to “buy the dip”.

Try to objectify your trading! 

Join our Discord server! We will help you build a mechanical trading system and backtest it! We will send you the code; you can backtest the system on ANY stock at ANY time!

https://discord.gg/usksugbr2H

The servers getting a bit large.

Make sure to join before we are forced to close off access for a bit!

Courses Archive – Kioseff Trading

Check out our Youtube Channel for trading systems with code access! (You can backtest the systems at any time AND set alerts)

Kioseff Trading – YouTube

-Kioseff Trading 

Legal Disclaimer: The information contained in the article is not intended as, and shall not be understood or construed as, financial advice. The author is  not an attorney, accountant, or financial advisor, nor are they holding themselves out to be, and the information contained in this article is not a substitute for a professional who is aware of the circumstances and facts of your personal financial situation. 

The author does not have a position for the discussed securities and does not plan to open a position for the discussed securities. 

Losses can exceed investment. Any stock mentioned throughout the article does not constitute advice or a recommendation. Any losses incurred that are due to error, accident, malfunction, or any loss due to any reason is not the legal responsibility or fault of the author. 

The article reflects an expressed opinion from the author. 

© Kioseff Trading. All rights reserved. No portion of this article, or any content on the website, may be redistributed or passed as one’s own without express permission from the author.

Fibonacci Retracement Percentages

Leonardo Fibonacci founded Fibonacci numbers and the Fibonacci sequence. They are numbers that are found to exist as part of a sequence that occurs in nature. Traders tend to open and close positions at these retracement percentages, so great significance is placed on them. 0, 23.6, 38.2, 61.8, and 78.6, are the primary Fibonacci retracement percentages used for trading. The Fibonacci retracement levels do extend beyond 100, so be aware of that. Also, 50% and 100% are not Fibonacci retracement percentages, but these levels are consequential enough to include as part of your analysis. 

We have a defined percentage parameter in which a trend frequently retraces before continuing. Because the minimum percentage of this parameter is 33%, and the maximum percentage of this parameter is 66%, what are the two most important Fibonacci retracement levels? Two levels exist within this parameter, 38.2%, and 61.8%. Prices tend to retrace between these percentages before continuing the predominant trend. The 33-66% retracement parameter applies to short-term, intermediate-term, and long-term trends. Should you predicate your trading decisions solely on these levels? Of course not! However, by implementing retracement percentages, we can ascertain lower-risk trading opportunities, distinguish the strength of a trend, and classify a reversal.

To be fair, Fibonacci retracement percentages are a self-fulfilling prophecy. A natural tendency for market prices to follow the sequence is not substantiated. Benjamin Graham is often credited with saying “In the short run, the market is a voting machine”, and I believe he is correct. Traders consider the Fibonacci levels to be adequate entry or exit points; therefore, the percentages tend to function as levels of support or resistance. How do we interpret this? Honestly, who cares! Even if retracement percentages operate as a self-fulfilling prophecy, if it works, it works. If we can identify price areas/retracement levels where buying/selling is likely to increase, we should capitalize on it. The tool is advantageous uses outside of its self-fulfilling properties.

Exploiting Fibonacci retracement levels mechanically is a bit tough; the method is extremely subjective. Tradingview tried to do it with their Auto Fib Retracement tool. It fails miserably.

Take a look,

 

Not so great, huh?

The tool fails to account for the predominant trend (long-term), and draws fib levels for some bearish retracements during the uptrend. We aren’t going to achieve consistent profitability using the Fib tool to calculate retracement percentages for the retracement itself! We want to calculate retracement percentages for the actual trend. In addition, the tool calculates retracement percentages during phases of sideways movement. Sideways price movement is always bound between a major support and resistance level; there’s no trend in motion. Remember, Fibs are a trend retracement tool. No trend = no trend retracement. 

This isn’t the Tradingview’s fault. It’s just difficult to objectify something so inherently subjective.

Some analysts might consider the tool to be accurate in its automated form. This is largely due to there not being a standardized method of implementation. 

However, the astute retail trader implementing a discretionary system can benefit from using the Fib retracement tool. Why? Using the tool is more of an art than a science. There’s no consensus on proper implementation of the indicator – you really have to optimize it yourself. 

That said, I will discuss my interpretation of the indicator and how the method can be optimized as part of a discretionary system. 

To accurately draw the retracement levels, simply select your broker’s Fibonacci retracement tool. Select the highest-priced shadow before a downtrend begins, and then select the lowest shadow at the bottom of the current downtrend. This will display the retracement percentages for a downtrend. To determine the retracement percentages for an uptrend, simply reverse the sequence above. Plot your retracement tool at the lowest shadow before an uptrend and then select the highest shadow at the top of the uptrend. For these retracement levels to function correctly, the trend must be retracing, and you must be aware of the general trend. 

Before we look at illustrations, let’s discuss how the retracement tool is commonly employed incorrectly. Many traders use the tool incorrectly because they are unable to discern a short-term, intermediate-term, and long-term trend from one another. It should not be too difficult to distinguish between the three. We can’t use the tool to calculate retracement percentages for a short-term uptrend when selecting the lowest low and highest high of the long-term uptrend, which the short-term uptrend resides in. The resulting data will not be suitable. Reverse this for a downtrend. Also, many traders use the tool to calculate the retracement percentages of the actual retracement itself. This is not what we should do.

 

Figure 1.1 Using Fibonacci Retracement Tool for a Bullish Retracement

Fibonacci Retracements Downtrend

Fibonacci Retracements Downtrend

Figure 1.1 depicts how to use the retracement tool for a bullish retracement of the entire intermediate-term downtrend. We should narrow our start-point and end-point when calculating the percentages for short-term downtrends which progress the intermediate-term downtrend. We will expand on this in examples.

Figure 1.2 Using Fibonacci Retracement Tool for a Bearish Retracement

Fibonacci Retracements Uptrend

Figure 1.2 depicts how to use the Fibonacci retracement tool for a bearish retracement. We are using the retracement tool to calculate the bearish retracement percentages of the intermediate-term uptrend. See how the very last downward extension of the trend ends at the previous support point? Where it says, “This bearish retracement will be calculated for?” This is very important. That last extension is considered a short-term bearish reversal. We will cover why in the next figure. The short-term bearish reversal is also a bearish retracement of the intermediate-term uptrend. If we want to calculate the retracement percentages for the short-term uptrend preceding the “highest high before bearish retracement,” we should not do what is done in Figure 3.9. I know this sounds confusing. It will make much more sense in the next few examples.

The Fibonacci retracement tool used in the upcoming examples has been adjusted. I manually adjusted the indicator to account for 33%, thereby excluding 23.6%. In addition, the indicator calculates a 66% retracement instead of 78.6%. Therefore, my tool calculates 33, 38.2, 50, 61.8, and 66 percent.

Figure 1.3 Short-Term Uptrends Within Intermediate-Term Uptrend

Fibonacci Retracement Percentages

(NYSE: KR)

Figure 1.3 shows two short-term uptrends comprising an intermediate-term uptrend. Let’s see how we can properly use retracement percentages here.

Figure 1.4 Retracement Percentages of Short-Term Uptrend

Fibonacci Retracement Percentages

(NYSE:KR)

Figure 1.4 shows how to use the retracement tool to calculate retracement percentages for the short-term uptrend. Our start-point is the lowest low of the short-term uptrend and our end-point is the highest high of the short-term uptrend. We can see prices bearishly retraced 66% before continuing the uptrend. Traders are not eager to get in the trend by this metric. Buying intensity exceeds selling intensity; however, if we use the retracement tool in isolation, the current uptrend is nothing to write home about.

We can see that another short-term uptrend institutes after the bearish retracement. Therefore, the two short-term uptrends comprise an intermediate-term uptrend. How do we calculate the retracement percentages for the next short-term uptrend? Let’s start with what we shouldn’t do.

Figure 1.5 What We Shouldn’t Do

Fibonacci Retracement Percentages

(NYSE:KR)

Figure 1.5 shows how not to use the retracement tool to calculate percentages during the second short-term uptrend. We should not use the lowest low of the intermediate-term uptrend to calculate bearish retracement percentages for a short-term uptrend. We can see that prices did not extend into our retracement parameters when moving against the trend. Now, let’s look at what we should do.

 

Figure 1.6 What We Should Do

Fibonacci Retracement Percentages

(NYSE:KR)

Figure 1.6 shows exactly how to implement the retracement tool for the second short-term uptrend. The start point is the lowest low of the short-term uptrend that institutes after the bearish retracement of the first short-term uptrend. We can see prices retrace approximately 38.2%. Also, the session before the gap-up continuation of the uptrend results in a hammer. We know the significance of that. Candlestick formations and patterns, particularly on high volume, are strong signals when occurring within retracement parameters of a strong trend.

I am not a fan of indicators that try to forecast price areas where support or resistance might transpire. I prefer to capitalize on support/resistance levels that have already formed and are major. Trying to guess where support or resistance could form is arduous. However, retracement percentages are an exception. Far too many traders consider them important to the extent they actually become important.

Many skeptics denounce Fibonacci retracement percentages as a self-fulfilling prophecy. I praise them as a self-fulfilling prophecy. If we know traders are looking to buy the dip during a strong uptrend, and a large portion are looking to do so after a 33-50% retracement, we should use that information to our advantage. The increased demand will continue the uptrend. Vice versa for a strong downtrend. We shouldn’t let anyone convince us to not use something that works. As we know, market price fluctuations are contingent on supply and demand. If we can distinguish levels where demand considerably exceeds supply (support), or supply considerably exceeds demand (resistance), or even forecast potential price levels where one or the other may occur (retracement percentages), we are giving ourselves an edge.

We still have a lot to learn; however, retracements can be used to distinguish entry points into a strong trend in addition to evaluating the strength of that trend. We would greatly benefit from using a momentum indicator here, such as RSI or moving averages. 

At this time, the uptrend is gaining momentum. Let’s adjust the number of observable sessions to see how the trend progressed.

 

Figure 1.7 Uptrend Development

Fibonacci Retracement Percentages Long-Term Trend

(NYSE: KR)

Figure 1.7 shows the intermediate-term uptrend develops into a long-term uptrend. Be sure to pay special attention to the next sentence. All bearish retracements up until the “What Happened Here?” arrow should not have been calculated by using the lowest low (institution point) of the long-term uptrend. There was not a bearish retracement of the long-term uptrend. The long-term uptrend was in motion the entire time, up until “What Happened Here?” The intermediate-term downtrend in late 2013 to early 2014 was a bearish retracement of the long-term uptrend. How can we differentiate this? Let’s use the retracement tool on the short-term uptrend preceding the intermediate-term downtrend (bearish retracement) of the long-term uptrend.

Figure 1.8 Bearish Reversal of Short-Term Uptrend

Fibonacci Retracement Percentages Reversal

(NYSE:KR)

Figure 1.8 shows the retracement percentages for the short-term uptrend preceding the intermediate-term downtrend. There is some critical information to ascertain here. First, when the 66% retracement level is validly penetrated, whether a short-term, intermediate-term, or long-term trend, we should consider a complete reversal in motion. We should no longer consider prices to be retracing the trend. This does not mean a complete long-term reversal is going to occur.

Second, and most importantly, we must know how the bearish reversal of the short-term uptrend resides within the long-term uptrend. We can now use the retracement tool to calculate retracement percentages for the uptrend in its entirety (long-term), not just short-term uptrends.

Third, many traders improperly use the retracement tool when a sequence of prices similar to Figure 3.17 occurs. Many traders use the retracement tool to calculate percentages for the intermediate-term downtrend (bearish retracement) itself, going from the highest high to the lowest low. This is not entirely incorrect; money can be made by joining in the intermediate-term downtrend. However, this is a fallacious approach when failing to account for the retracement percentages of the long-term trend in motion.

Figure 1.9 Long-Term Uptrend Retracement

Fibonacci Retracement Percentages Major Trend

(NYSE: KR)

Figure 1.9 shows us finally using the institution point of the long-term uptrend to calculate retracement percentages. The bearish reversal was a 38.2% bearish retracement of the long-term uptrend. This is why a macro to micro approach is a prerequisite to trading a security. The last thing we want to do is go short during the bearish retracement when prices are near a prominent retracement percentage of the long-term uptrend. We won’t do this if we know the downtrend might be a retracement of a much stronger uptrend in motion.

Prices bearishly retrace the long-term uptrend 38.2%; therefore, we should conclude the long-term uptrend is strong and in motion. Valid penetration is applicable with retracement percentages. If the retracement level is validly penetrated, particularly 66%, we can always cut our losses short and look for another entry-point later if the trend continues. No position should be opened in the absence of a trading strategy.

Retracement percentages offer precise areas where buying the dip of a strong trend is optimal. Remember, a trend in motion consistently retracing 33%-38.2% at most is generally strong. A trend in motion consistently retracing 50% is healthy and sustainable. A trend consistently retracing 66% can still be traded in favor of. We just have to be cautious of potential exhaustion when the trend continues. We can look at retracements of 33%-66% as an opportunity to buy the dip if additional indications are present. This strategy works extremely well in conjunction with RSI analysis and a simple moving average.

Let’s say stock XYZ is experiencing a strong uptrend. The uptrend has caused stock XYZ to reach a relatively high price per share and those who account for fundamentals and theory (where prices should be) consider XYZ to be “overvalued.” When prices institute a move against the uptrend (bearish retracement), some theorists might claim “The uptrend is finally over! This is the top! XYZ is overvalued!” Let’s say prices bearishly retrace 33% before continuing the predominant uptrend. Despite any theory or acquaintance sentiment, we can conclude the uptrend is strong and in motion. Traders of stock XYZ considered the 33% retracement as an adequate opportunity to buy the dip. Let’s see how the trend progresses.

Figure 1.10 Long-Term Uptrend Strong Momentum

Uptrend

(NYSE: KR)

Figure 1.10 shows the uptrend is strong and remains in motion after the 38.2% bearish retracement.

Figure 1.11 Fibonacci Retracement in an Uptrend (1)

How to Use Finbonacci Retracements

(NASDAQ: GOOG)

Figure 1.11 shows a proper implementation of the Fibonacci retracement tool in an uptrend. Prices bearishly retrace the uptrend in October, buying intensity increases around the 38.2% level; the uptrend continues. Notice the dragonfly doji formation during the retracement. The intrasession low price (lower wick) occurred around 38.2% and increased demand closed prices higher. In the absence of complementary indicators, we can interpret this as bullish. For those of you not backtesting your strategies, analyzing candlestick formations and patterns, in addition to volume, at Fibonacci retracement percentages is an adequate constituent of a trading strategy.

Prices continue uptrending, and a large price decline transpires in early 2018. Let’s adjust our Fibonacci retracement endpoint to distinguish price levels that correlate with the retracement percentage parameters.

Figure 1.12 Fibonacci Retracement in a Downtrend (3)

Fibonacci

(NASDAQ: GOOG)

Figure 1.12 shows our adjusted endpoint. The long-term uptrend has lost momentum. Prices gap down and decline until demand exceeds supply at the 66% retracement level. This level is not validly penetrated and prices increase thereafter.

Assuming you are long in the uptrend, you can use the Fibonacci retracement tool to discern between a retracement and a reversal. If prices simply retrace and your exit-strategy criteria are not fulfilled, you can sustain a position in favor of the trend. That being said, the expeditious sell-off is considered a bearish reversal of the short-term uptrend preceding the sell-off. This same sell-off is considered a bearish retracement of the intermediate-term uptrend in its entirety. Again, we do not want to go short when the 66% retracement level of the intermediate-term uptrend is tested. The possibility of increased demand is just too great; risk transcends reward. If prices validly penetrate the 66% retracement level, we should consider a bearish reversal of the intermediate-term uptrend in motion, and possibly distinguish entry-points into the downtrend if it is strong.

Figure 1.13 Support and Resistance with Fibonacci Retracement %

COVID Crash (NYSEARCA: SPY)

Figure 1.13 shows the bullish reversal of the COVID-19 crash. This bullish reversal had a large portion of retail investors baffled, particularly the theorists. We can see valid penetration of the 66% retracement level. Applying what’s been covered up until now, we can consider a complete bullish reversal in motion when the 66% retracement level is validly penetrated. 

Key Takeaways

  • Fibs can work when used with in their scope. 
  • A Fibonacci system/strategy is difficult to objectify.
  • The methodology is only as good as the trader applying it – as with any discretionary system.
  • Even if Fibs didn’t function as a self-fulfilling prophecy: they can still be used to distinguish good price areas to “buy the dip”.

Try to objectify your trading! 

Join our Discord server! We will help you build a mechanical trading system and backtest it! We will send you the code; you can backtest the system on ANY stock at ANY time!

https://discord.gg/usksugbr2H

The servers getting a bit large.

Make sure to join before we are forced to close off access for a bit!

Courses Archive – Kioseff Trading

Check out our Youtube Channel for trading systems with code access! (You can backtest the systems at any time AND set alerts)

Kioseff Trading – YouTube

-Kioseff Trading 

Legal Disclaimer: The information contained in the article is not intended as, and shall not be understood or construed as, financial advice. The author is  not an attorney, accountant, or financial advisor, nor are they holding themselves out to be, and the information contained in this article is not a substitute for a professional who is aware of the circumstances and facts of your personal financial situation. 

The author does not have a position for the discussed securities and does not plan to open a position for the discussed securities. 

Losses can exceed investment. Any stock mentioned throughout the article does not constitute advice or a recommendation. Any losses incurred that are due to error, accident, malfunction, or any loss due to any reason is not the legal responsibility or fault of the author. 

The article reflects an expressed opinion from the author. 

© Kioseff Trading. All rights reserved. No portion of this article, or any content on the website, may be redistributed or passed as one’s own without express permission from the author.

Fibonacci Retracement Percentages

Leonardo Fibonacci founded Fibonacci numbers and the Fibonacci sequence. They are numbers that are found to exist as part of a sequence that occurs in nature. Traders tend to open and close positions at these retracement percentages, so great significance is placed on them. 0, 23.6, 38.2, 61.8, and 78.6, are the primary Fibonacci retracement percentages used for trading. The Fibonacci retracement levels do extend beyond 100, so be aware of that. Also, 50% and 100% are not Fibonacci retracement percentages, but these levels are consequential enough to include as part of your analysis. 

We have a defined percentage parameter in which a trend frequently retraces before continuing. Because the minimum percentage of this parameter is 33%, and the maximum percentage of this parameter is 66%, what are the two most important Fibonacci retracement levels? Two levels exist within this parameter, 38.2%, and 61.8%. Prices tend to retrace between these percentages before continuing the predominant trend. The 33-66% retracement parameter applies to short-term, intermediate-term, and long-term trends. Should you predicate your trading decisions solely on these levels? Of course not! However, by implementing retracement percentages, we can ascertain lower-risk trading opportunities, distinguish the strength of a trend, and classify a reversal.

To be fair, Fibonacci retracement percentages are a self-fulfilling prophecy. A natural tendency for market prices to follow the sequence is not substantiated. Benjamin Graham is often credited with saying “In the short run, the market is a voting machine”, and I believe he is correct. Traders consider the Fibonacci levels to be adequate entry or exit points; therefore, the percentages tend to function as levels of support or resistance. How do we interpret this? Honestly, who cares! Even if retracement percentages operate as a self-fulfilling prophecy, if it works, it works. If we can identify price areas/retracement levels where buying/selling is likely to increase, we should capitalize on it. The tool is advantageous uses outside of its self-fulfilling properties.

Exploiting Fibonacci retracement levels mechanically is a bit tough; the method is extremely subjective. Tradingview tried to do it with their Auto Fib Retracement tool. It fails miserably.

Take a look,

Not so great, huh?

The tool fails to account for the predominant trend (long-term), and draws fib levels for some bearish retracements during the uptrend. We aren’t going to achieve consistent profitability using the Fib tool to calculate retracement percentages for the retracement itself! We want to calculate retracement percentages for the actual trend. In addition, the tool calculates retracement percentages during phases of sideways movement. Sideways price movement is always bound between a major support and resistance level; there’s no trend in motion. Remember, Fibs are a trend retracement tool. No trend = no trend retracement. 

This isn’t the Tradingview’s fault. It’s just difficult to objectify something so inherently subjective.

Some analysts might consider the tool to be accurate in its automated form. This is largely due to there not being a standardized method of implementation. 

However, the astute retail trader implementing a discretionary system can benefit from using the Fib retracement tool. Why? Using the tool is more of an art than a science. There’s no consensus on proper implementation of the indicator – you really have to optimize it yourself. 

That said, I will discuss my interpretation of the indicator and how the method can be optimized as part of a discretionary system. 

To accurately draw the retracement levels, simply select your broker’s Fibonacci retracement tool. Select the highest-priced shadow before a downtrend begins, and then select the lowest shadow at the bottom of the current downtrend. This will display the retracement percentages for a downtrend. To determine the retracement percentages for an uptrend, simply reverse the sequence above. Plot your retracement tool at the lowest shadow before an uptrend and then select the highest shadow at the top of the uptrend. For these retracement levels to function correctly, the trend must be retracing, and you must be aware of the general trend. 

Before we look at illustrations, let’s discuss how the retracement tool is commonly employed incorrectly. Many traders use the tool incorrectly because they are unable to discern a short-term, intermediate-term, and long-term trend from one another. It should not be too difficult to distinguish between the three. We can’t use the tool to calculate retracement percentages for a short-term uptrend when selecting the lowest low and highest high of the long-term uptrend, which the short-term uptrend resides in. The resulting data will not be suitable. Reverse this for a downtrend. Also, many traders use the tool to calculate the retracement percentages of the actual retracement itself. This is not what we should do.

Figure 1.1 Using Fibonacci Retracement Tool for a Bullish Retracement

Fibonacci Retracements Downtrend

Fibonacci Retracements Downtrend

Figure 1.1 depicts how to use the retracement tool for a bullish retracement of the entire intermediate-term downtrend. We should narrow our start-point and end-point when calculating the percentages for short-term downtrends which progress the intermediate-term downtrend. We will expand on this in examples.

Figure 1.2 Using Fibonacci Retracement Tool for a Bearish Retracement

Fibonacci Retracements Uptrend

Figure 1.2 depicts how to use the Fibonacci retracement tool for a bearish retracement. We are using the retracement tool to calculate the bearish retracement percentages of the intermediate-term uptrend. See how the very last downward extension of the trend ends at the previous support point? Where it says, “This bearish retracement will be calculated for?” This is very important. That last extension is considered a short-term bearish reversal. We will cover why in the next figure. The short-term bearish reversal is also a bearish retracement of the intermediate-term uptrend. If we want to calculate the retracement percentages for the short-term uptrend preceding the “highest high before bearish retracement,” we should not do what is done in Figure 3.9. I know this sounds confusing. It will make much more sense in the next few examples.

The Fibonacci retracement tool used in the upcoming examples has been adjusted. I manually adjusted the indicator to account for 33%, thereby excluding 23.6%. In addition, the indicator calculates a 66% retracement instead of 78.6%. Therefore, my tool calculates 33, 38.2, 50, 61.8, and 66 percent.

Figure 1.3 Short-Term Uptrends Within Intermediate-Term Uptrend

Fibonacci Retracement Percentages

(NYSE: KR)

Figure 1.3 shows two short-term uptrends comprising an intermediate-term uptrend. Let’s see how we can properly use retracement percentages here.

Figure 1.4 Retracement Percentages of Short-Term Uptrend

Fibonacci Retracement Percentages

(NYSE:KR)

Figure 1.4 shows how to use the retracement tool to calculate retracement percentages for the short-term uptrend. Our start-point is the lowest low of the short-term uptrend and our end-point is the highest high of the short-term uptrend. We can see prices bearishly retraced 66% before continuing the uptrend. Traders are not eager to get in the trend by this metric. Buying intensity exceeds selling intensity; however, if we use the retracement tool in isolation, the current uptrend is nothing to write home about.

We can see that another short-term uptrend institutes after the bearish retracement. Therefore, the two short-term uptrends comprise an intermediate-term uptrend. How do we calculate the retracement percentages for the next short-term uptrend? Let’s start with what we shouldn’t do.

Figure 1.5 What We Shouldn’t Do

Fibonacci Retracement Percentages

(NYSE:KR)

Figure 1.5 shows how not to use the retracement tool to calculate percentages during the second short-term uptrend. We should not use the lowest low of the intermediate-term uptrend to calculate bearish retracement percentages for a short-term uptrend. We can see that prices did not extend into our retracement parameters when moving against the trend. Now, let’s look at what we should do.

Figure 1.6 What We Should Do

Fibonacci Retracement Percentages

(NYSE:KR)

Figure 1.6 shows exactly how to implement the retracement tool for the second short-term uptrend. The start point is the lowest low of the short-term uptrend that institutes after the bearish retracement of the first short-term uptrend. We can see prices retrace approximately 38.2%. Also, the session before the gap-up continuation of the uptrend results in a hammer. We know the significance of that. Candlestick formations and patterns, particularly on high volume, are strong signals when occurring within retracement parameters of a strong trend.

I am not a fan of indicators that try to forecast price areas where support or resistance might transpire. I prefer to capitalize on support/resistance levels that have already formed and are major. Trying to guess where support or resistance could form is arduous. However, retracement percentages are an exception. Far too many traders consider them important to the extent they actually become important.

Many skeptics denounce Fibonacci retracement percentages as a self-fulfilling prophecy. I praise them as a self-fulfilling prophecy. If we know traders are looking to buy the dip during a strong uptrend, and a large portion are looking to do so after a 33-50% retracement, we should use that information to our advantage. The increased demand will continue the uptrend. Vice versa for a strong downtrend. We shouldn’t let anyone convince us to not use something that works. As we know, market price fluctuations are contingent on supply and demand. If we can distinguish levels where demand considerably exceeds supply (support), or supply considerably exceeds demand (resistance), or even forecast potential price levels where one or the other may occur (retracement percentages), we are giving ourselves an edge.

We still have a lot to learn; however, retracements can be used to distinguish entry points into a strong trend in addition to evaluating the strength of that trend. We would greatly benefit from using a momentum indicator here, such as RSI or moving averages. 

At this time, the uptrend is gaining momentum. Let’s adjust the number of observable sessions to see how the trend progressed.

Figure 1.7 Uptrend Development

Fibonacci Retracement Percentages Long-Term Trend

(NYSE: KR)

Figure 1.7 shows the intermediate-term uptrend develops into a long-term uptrend. Be sure to pay special attention to the next sentence. All bearish retracements up until the “What Happened Here?” arrow should not have been calculated by using the lowest low (institution point) of the long-term uptrend. There was not a bearish retracement of the long-term uptrend. The long-term uptrend was in motion the entire time, up until “What Happened Here?” The intermediate-term downtrend in late 2013 to early 2014 was a bearish retracement of the long-term uptrend. How can we differentiate this? Let’s use the retracement tool on the short-term uptrend preceding the intermediate-term downtrend (bearish retracement) of the long-term uptrend.

Figure 1.8 Bearish Reversal of Short-Term Uptrend

Fibonacci Retracement Percentages Reversal

(NYSE:KR)

Figure 1.8 shows the retracement percentages for the short-term uptrend preceding the intermediate-term downtrend. There is some critical information to ascertain here. First, when the 66% retracement level is validly penetrated, whether a short-term, intermediate-term, or long-term trend, we should consider a complete reversal in motion. We should no longer consider prices to be retracing the trend. This does not mean a complete long-term reversal is going to occur.

Second, and most importantly, we must know how the bearish reversal of the short-term uptrend resides within the long-term uptrend. We can now use the retracement tool to calculate retracement percentages for the uptrend in its entirety (long-term), not just short-term uptrends.

Third, many traders improperly use the retracement tool when a sequence of prices similar to Figure 3.17 occurs. Many traders use the retracement tool to calculate percentages for the intermediate-term downtrend (bearish retracement) itself, going from the highest high to the lowest low. This is not entirely incorrect; money can be made by joining in the intermediate-term downtrend. However, this is a fallacious approach when failing to account for the retracement percentages of the long-term trend in motion.

Figure 1.9 Long-Term Uptrend Retracement

Fibonacci Retracement Percentages Major Trend

(NYSE: KR)

Figure 1.9 shows us finally using the institution point of the long-term uptrend to calculate retracement percentages. The bearish reversal was a 38.2% bearish retracement of the long-term uptrend. This is why a macro to micro approach is a prerequisite to trading a security. The last thing we want to do is go short during the bearish retracement when prices are near a prominent retracement percentage of the long-term uptrend. We won’t do this if we know the downtrend might be a retracement of a much stronger uptrend in motion.

Prices bearishly retrace the long-term uptrend 38.2%; therefore, we should conclude the long-term uptrend is strong and in motion. Valid penetration is applicable with retracement percentages. If the retracement level is validly penetrated, particularly 66%, we can always cut our losses short and look for another entry-point later if the trend continues. No position should be opened in the absence of a trading strategy.

Retracement percentages offer precise areas where buying the dip of a strong trend is optimal. Remember, a trend in motion consistently retracing 33%-38.2% at most is generally strong. A trend in motion consistently retracing 50% is healthy and sustainable. A trend consistently retracing 66% can still be traded in favor of. We just have to be cautious of potential exhaustion when the trend continues. We can look at retracements of 33%-66% as an opportunity to buy the dip if additional indications are present. This strategy works extremely well in conjunction with RSI analysis and a simple moving average.

Let’s say stock XYZ is experiencing a strong uptrend. The uptrend has caused stock XYZ to reach a relatively high price per share and those who account for fundamentals and theory (where prices should be) consider XYZ to be “overvalued.” When prices institute a move against the uptrend (bearish retracement), some theorists might claim “The uptrend is finally over! This is the top! XYZ is overvalued!” Let’s say prices bearishly retrace 33% before continuing the predominant uptrend. Despite any theory or acquaintance sentiment, we can conclude the uptrend is strong and in motion. Traders of stock XYZ considered the 33% retracement as an adequate opportunity to buy the dip. Let’s see how the trend progresses.

Figure 1.10 Long-Term Uptrend Strong Momentum

Uptrend

(NYSE: KR)

Figure 1.10 shows the uptrend is strong and remains in motion after the 38.2% bearish retracement.

Figure 1.11 Fibonacci Retracement in an Uptrend (1)

How to Use Finbonacci Retracements

(NASDAQ: GOOG)

Figure 1.11 shows a proper implementation of the Fibonacci retracement tool in an uptrend. Prices bearishly retrace the uptrend in October, buying intensity increases around the 38.2% level; the uptrend continues. Notice the dragonfly doji formation during the retracement. The intrasession low price (lower wick) occurred around 38.2% and increased demand closed prices higher. In the absence of complementary indicators, we can interpret this as bullish. For those of you not backtesting your strategies, analyzing candlestick formations and patterns, in addition to volume, at Fibonacci retracement percentages is an adequate constituent of a trading strategy.

Prices continue uptrending, and a large price decline transpires in early 2018. Let’s adjust our Fibonacci retracement endpoint to distinguish price levels that correlate with the retracement percentage parameters.

Figure 1.12 Fibonacci Retracement in a Downtrend (3)

Fibonacci

(NASDAQ: GOOG)

Figure 1.12 shows our adjusted endpoint. The long-term uptrend has lost momentum. Prices gap down and decline until demand exceeds supply at the 66% retracement level. This level is not validly penetrated and prices increase thereafter.

Assuming you are long in the uptrend, you can use the Fibonacci retracement tool to discern between a retracement and a reversal. If prices simply retrace and your exit-strategy criteria are not fulfilled, you can sustain a position in favor of the trend. That being said, the expeditious sell-off is considered a bearish reversal of the short-term uptrend preceding the sell-off. This same sell-off is considered a bearish retracement of the intermediate-term uptrend in its entirety. Again, we do not want to go short when the 66% retracement level of the intermediate-term uptrend is tested. The possibility of increased demand is just too great; risk transcends reward. If prices validly penetrate the 66% retracement level, we should consider a bearish reversal of the intermediate-term uptrend in motion, and possibly distinguish entry-points into the downtrend if it is strong.

Figure 1.13 Support and Resistance with Fibonacci Retracement %

COVID Crash (NYSEARCA: SPY)

Figure 1.13 shows the bullish reversal of the COVID-19 crash. This bullish reversal had a large portion of retail investors baffled, particularly the theorists. We can see valid penetration of the 66% retracement level. Applying what’s been covered up until now, we can consider a complete bullish reversal in motion when the 66% retracement level is validly penetrated. 

Key Takeaways

  • Fibs can work when used with in their scope. 
  • A Fibonacci system/strategy is difficult to objectify.
  • The methodology is only as good as the trader applying it – as with any discretionary system.
  • Even if Fibs didn’t function as a self-fulfilling prophecy: they can still be used to distinguish good price areas to “buy the dip”.

Try to objectify your trading! 

Join our Discord server! We will help you build a mechanical trading system and backtest it! We will send you the code; you can backtest the system on ANY stock at ANY time!

https://discord.gg/usksugbr2H

The servers getting a bit large.

Make sure to join before we are forced to close off access for a bit!

Courses Archive – Kioseff Trading

Check out our Youtube Channel for trading systems with code access! (You can backtest the systems at any time AND set alerts)

Kioseff Trading – YouTube

-Kioseff Trading 

Legal Disclaimer: The information contained in the article is not intended as, and shall not be understood or construed as, financial advice. The author is  not an attorney, accountant, or financial advisor, nor are they holding themselves out to be, and the information contained in this article is not a substitute for a professional who is aware of the circumstances and facts of your personal financial situation. 

The author does not have a position for the discussed securities and does not plan to open a position for the discussed securities. 

Losses can exceed investment. Any stock mentioned throughout the article does not constitute advice or a recommendation. Any losses incurred that are due to error, accident, malfunction, or any loss due to any reason is not the legal responsibility or fault of the author. 

The article reflects an expressed opinion from the author. 

© Kioseff Trading. All rights reserved. No portion of this article, or any content on the website, may be redistributed or passed as one’s own without express permission from the author.