DAY 13: Fibonacci – Exploring pullbacks and reversals

So far, we have learned a wide range of technical indicators, including moving averages, oscillators, and the Ichimoku Kinko Hyo.

In DAY 13,“When is the right level to wait for a pullback (retracement)?” is convenient to judge with Fibonacci analysis.

Many traders observing charts consciously or unconsciously rely on Fibonacci lines to determine taking profit or stop-loss points.

Let’s quickly look at the basics and how to use them.

1. What is Fibonacci?

• Origin: Based on the ratios derived from the “Fibonacci sequence” popularized by medieval Italian mathematician Leonardo Fibonacci.
• Golden ratio: 1.618… and other related ratios are famous as harmonious proportions seen in nature and art.
• Application to trading: Used to gauge pullbacks, retracements, and targets for upward or downward moves.
  
  

2. Fibonacci Retracement

(1) Representative Fibonacci ratios

• 23.6%, 38.2%, 50.0%, 61.8%, 76.4%
• Among these, the 38.2%, 50.0%, and 61.8% levels are especially commonly used.
• This is a gauge for predicting how far a market may pull back after moving in one direction.
  
  

(2) Basic usage

1. Draw a line between the most recent swing high and swing low
2. Aim for a bounce at important ratio lines
   • For example, in an uptrend, the price pulling back to 38.2%, 50.0%, or 61.8% is often followed by a bounce.
3. Set stop-loss and take-profit targets
   • For example, “for a pullback buy, stop below 61.8%” or “partial take-profit near the 38.2% or 50.0% line,” enabling clear rules.
     
     

(3) Cautions

• It does not guarantee a bounce; prices can bounce back and forth along the lines multiple times.
• Which swing highs/lows to base the lines on is subjective, so results can differ with how you draw them.
• It is recommended to use in conjunction with other technical indicators and price action of candles.
  
  

3. Fibonacci Expansion

(1) Why use expansion?

• While retracement measures pullbacks, expansionis used to estimate take-profit targets and next destination.
• In an uptrend, after a pullback ends, it’s convenient to guess how high prices can move.
  
  

(2) Basic usage

1. Specify three points
   1. Starting point (low in uptrend)
   2. Most recent high
   3. Low that seems to mark the end of the pullback (or high that marks the end of a retracement)
2. Ruler lines for ratios
   • Common display lines: 100%, 138.2%, 161.8%, 200%, etc.
   • Example: the 161.8% line tends to be watched.
3. Use for profit-taking or targets
   • You can create concrete plans such as “price may extend toward around 161.8% → take profits before that.”

(3) Cautions

• In sharp rises or falls, price can break through lines easily or fail to reach them and reverse.
• Selecting which swing highs/lows to use can affect accuracy.
• If there is confluence with other support/resistance lines, Ichimoku cloud, moving averages, etc., it strengthens the case.
  
  

4. Trading examples using Fibonacci

(1) Buy on pullback in uptrend

1. Draw Fibonacci retracement from the most recent swing low (A) to swing high (B).
2. Price pulls back to around 38.2% or 50.0% or 61.8% and a candlestick reversal signal (pin bar, etc.) appears.
3. Enter after confirming the bounce. Set a stop below 61.8% or below the most recent swing low.
4. Target after a breakout of the recent high (B) is toward the Expansion around 138.2% or 161.8%.
   
   

(2) Sell on retrace in downtrend

1. Draw Fibonacci retracement from the most recent high (X) to the most recent low (Y).
2. Price returns to the 38.2% or 50.0% line with the moving average slope still downward.
3. If a bearish candle pattern such as a bearish engulfing appears, consider selling.
4. Stop slightly above the 61.8% line; take profits by aiming for a new low or partial profit.
   
   

(3) Fibonacci in automated trading (EA)

• You can program Fibonacci to be detected automatically and trade pullbacks and retracements.
• However, codifying how to choose which highs/lows to use remains a challenge.
  
  

5. Pros & Cons

Pros

1. Easy to set concrete numerical targets
   • Plans like “pull back to here” or “if it exceeds this line, next is that line” become clear.
2. Widely watched by traders
   • Especially the 61.8% and 50%, attracting speculators and institutions, can serve as support/resistance reliably.
3. Simple to draw
   • Most charting tools have it built-in; drawing one line can display multiple Fibonacci lines instantly.
     
     

1. Many lines exist, making it hard to know which is important
   • With multiple lines like 23.6%, 38.2%, 50%, 61.8%, 76.4%, narrowing down “where reaction occurs” is difficult.
2. Subjectivity in selecting highs/lows
   • What to start from varies by person; false signals can occur.
3. Breakthroughs during volatile markets
   • During earnings releases or sudden moves, lines may not function well.
     
     

6. Summary & Next up

Summary

1. Fibonacci Retracement: Use the representative levels such as 38.2%, 50.0%, 61.8% as pullback/guidance.
   
   
2. Fibonacci Expansion: Useful for take-profit points and destination targets for up or down moves.
   
   
3. Results depend on which highs/lows are chosen; confirm candles and combine with other technicals to seek “overlapping evidence.”
   
   
4. Since these are lines many traders watch, support-resistance functions tend to work well, but not perfectly; always have stop-loss and a Plan B ready.
   
   

Next (DAY 14) theme: Technical analysis summary & Q&A

• Review DAY 8–13 comprehensively of moving averages, oscillators (including MACD), Bollinger Bands, Ichimoku, Fibonacci, and summarize with common questions.
  
  
• Reconfirm strengths and weaknesses of each, discuss effective combinations, and answer common questions.

If you are interested in automated trading, please also check the link below.
https://www.gogojungle.co.jp/users/147322/products

If this was helpful, please press “Read more.”
Thank you.