Since I learned about fib retracements I’d only heard about 38.2%, 50% and 61.8% retracements but today I was watching eur/jpy chart and waiting for a 38.2% retracement after its breakout, but it never got down that far, then I noticed that you can choose to display 23.6% level also on marketscope and it made a perfect fit! So can we really call that a fib retracement or should we still expect it to pullback to 38.2% or maybe 50%? If there is such thing as 23.6% retracement, then it would mean that the trend is very strong, wouldn’t it?
I’m no fib expert so I can’t answer your question, but just so you know I checked and Metatrader displays the 23.6% level on it’s fibs. So it is a real level.
The school they have here on babypips indicates that all the fib levels are a possibility, but there are some that are more common than others.
Price is susceptible to just as well reverse at any fib retracement or extension.
Instead of trying to set a firm level at where price is going to reverse, watch price itself. You’ll know which level is a point of support/resistance simply by watching how price reacts around it.
Fibonacci retracement is created by taking two extreme points (usually a major peak and trough) on a chart and dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%.
(With thanks to Investopedia)
Read the whole article here. What is Fibonacci retracement, and where do the ratios that are used come from?
I would agree that since a 38.2% indicates a strong trend [B]after an extreme price movement[/B] , the same could be said for a 23.6% retracement if price cannot break past it.
Then of course are the 2 scenarios.
1)If price doesn’t break it, then it could also represent a retest of the swing high/low (0) before reversing again from 0 and returning to the 23.6 to head towards the 38.2 and perhaps beyond.
2)If price headed back to 0, then look for a breakout trade from 0 to continue in the same trend direction.
That’s why watching price action, using a secondary indicator like an oscillator, and/or convergence with other fib levels, helps with the analysis.
23.6% is like the reciprocal equivalent to the 78.6% or 76.4% (100 - 23.6). I’m still trying to figure out why some use 78.6 and others use 76.4…
Adding to what mastergunner said… Often when starting out and learning to trade off S&R, or use fibs as S&R, traders don’t consider the price action at that particular line or Fib. They assume the fib lines will automatically create a bounce or break. The only reason they do is because other traders are making that happen.
Instead of just waiting for it to bounce or break off the line consider these things about the price action:
-
Time of day. Is it at a time of day that usually has lot of traders. more traders will add feul to the fire of a move.
-
ATR of recent candles.
-
Volatility.
-
Momentum. This one is the most important IMO. If you see a candle making a fast strong move, and it is very near a line, there is probably a good chance of a break. If it moves up and peters out and then the next few candles start to move sideways or go towards the line and then drift back, you may have a reversal. (but again, it could just be lack of traders and be a rest, so keep in mind the time of day)
Always, think of it as a war between the bulls and bears. Who has more power? You want to join which ever side is winning!
Going further with the war imagry I like to think of support and resistance as lines of apposing armies that either push back on coming attackers, or can’t withstand attack and their infantry lines get broken. Then of course any one army is only has so much endurance, so at some point they will have to rest and fall back, at least for a bit.