Diving into Fibonacci Retracements – Part 3

By Olley / September 9, 2021

Chart Examples

There will be a decent amount of screenshots in this section, I apologize if it gets a little lengthy. But the visuals will help you understand them a lot more, especially if you are like me; a visual learner.

Example 1 – A Bearish Retracement

In this example, Bitcoin is in a downtrend on the low-mid time frames (4h -> 12hr).

Once you identify the trend you will know which pivot points to use to ensure you are positioning for the larger trend after a pullback. Also sometimes known as a ‘bearish retracement’. This is what I will call it in further reference for simplicity.

So in this case you want to be plotting your first anchor point at a high, and the second point at a low so price will find areas of resistance after a bounce up in price. This means you are expecting the price to continue in the former trend which is down past the lows, after a completed retracement.

(Down to a 2hr timeframe to show it in more detail). [ 15th Jan 2021 ]

Price first finds some resistance at the 0.5 retracement level, but breaks through it and instead finds its next lower high at the 0.618 zone (red box).

This suggests price is reacting strongly to the 0.618 level evident by the sell-off after it tested that region. Keep this in mind.

Although there wasn’t any continuation past the lows, the 0.618 still provided an edge for either potential long exits or short entries.

Rejecting at a 0.618 zone again

I have taken another retracement as the price has created another low point. Because of the previous example, you can hypothesize that if price gets up to the 0.618 level it should be respected well again (keyword; “if”).

The 0.618 on this retracement actually already lines up with the previous one which is more confluence in the strength of that resistance area. This is reasonably common in Fibonacci, where multiple retracements from different anchor points are showing key retraces in similar areas. This is something worth exploring and backtesting for yourself, because the more confluence you can add to your analysis, the stronger it can become.

Ultimately you decide how you want to implement this in your own system because I am only providing examples.

Example 2 – Looking for a higher low after a downtrend breaks.

If the chart looks similar it’s because this is the same period as the previous example, just after it had developed some more.

[ Bitcoin Around 30th Jan 2021 ]

So this obviously is in a downtrend on the 4hr time frame (but also was on the 12hr & Daily for reference) illustrated by the red semi-circles & the white dotted lines showing lower highs and lower lows. However, as price defended the wick lows shown by the green semi-circle, it has made a higher low but only by a ‘wick basis’ and not by closes yet.

Price then breaks the white local high horizontal while also closing above it with multiple candles. This confirms a higher high, and a break in the downtrend. To see a reversal in trend I look for another higher low for extra reinforcement. Essentially, the orange arrow is what I am looking for if an uptrend is confirmed.

A retracement is placed between the low and the high, which is visible by the text.

I usually look for a retracement to the 0.5 or 0.618 levels after a change in trend like this. But there is no guarantee of price getting there, it can sometimes be supported at the shallower 0.382 retracement. Remember, if this -> then that.

Evidently in this example, a 4hr candle already broke below the 0.382 level, so the next areas to look for support are the 0.5 & 0.618 levels.

Price gets supported on the 0.618 Fib zone, which coincided roughly where the white dotted trendline was as well. So in this case you have price making a 61.8% retracement + retesting the broken trendline or pattern.

Once the price breaks back above the 0.382 area I look at this as a completed retracement and look for another higher high with a continuation of the trend. As another higher low was just confirmed.

Example 3 – Directional bias from a higher time frame

This is a ‘Bullish Retracement’.

Here you can see that price is trending to the upside, making higher highs and higher lows shown by the green semi-circles. This means we should be looking for bullish retracements, where you place the first anchor point at a low, and the second at a high. (We want to position for bullish trend continuation).

To make sure you are positioning on the side of the former trend, you can use a higher time frame to get a bias.

Date: around the 28th November 2020

[4hr time frame chart]

Orange circles are the anchor points.
Remember it is from the left to the right for placing a Fibonacci retracement. The first point is on the left. The second point is on the right.

Price uses the 0.382 zone (yellow box) as support multiple times before breaking it. (Also see how it is used as resistance). This is an important point here, as knowing when the Fibonacci levels are being respected means you can ‘guess’ that other levels will as well. If a chart does not seem to be respecting any Fibonacci levels, it could mean you are either using the incorrect anchor points, or that particular Fib is not deemed as valid in the market.

Once the 0.382 area was broken this led to the test of the next level, the 0.5 retracement level, but more importantly to the deeper 0.618 retracement zone as shown by the white arrows.

In this example, you can clearly see each of the levels working as both support and resistance, this was a valid retracement.

Once the price had based off the 0.618 zone, and got back above the 0.382 yellow box the retracement was complete. Similar to ‘Example 2’, where it also broke above 0.382 zone and saw continuation.

However, knowing when a retracement is complete is subjective and depends on how aggressive or conservative you are with your rules.

Just to expand on this example and give some needed perspective, here is an overview of the Daily timeframe:

Daily time frame[1st December 2020]

The Daily shows the bullish trend a lot more obviously. Now this gives context to your Fibonacci retracement on the lower time frames. If you have an uptrend on the Daily you want to position your trades in the same direction.

So here price action is clearly making higher highs and higher lows. However, there was a slight pause as Daily momentum clearly was weakening (just above the 0.382 zone marked out) evident with the candle closes below lows. This lined up with that 0.382 zone breakdown I mentioned earlier, then the price quickly fell towards the 0.618 retracement and bounced twice off of it.

After the second 0.618 bounce, the Daily closed a strong candle over the 0.382 resistance zone which was also a horizontal level if using traditional support and resistance analysis (orange arrow).

Ultimately that 0.618 retest was the next major higher low, and was never seen again as Bitcoin continued further up into all-time highs.

  • As Shawn and Krisha show in the Daily videos, use the higher time frames to give you overall bias on the direction for lower time frames. This is an example of that using a Fibonacci retracement.
Additional confluence:

I have turned on the Mango Dynamic to show that it was also in agreement with the bullish trend, and gave more confluence to the 0.618 zone on both occasions. This is a simple example of how you can piece together trend analysis and Fibonacci retracements.

For example, the test of the 0.618 level and the Mango Dynamic could have been a starter position on a trend trade. Or a more conservative option would be to enter after the 0.382 zone had been broken by one or two consecutive daily closes above.

However, the best way to figure out what works for you is first to decide if it fits in your trading style, and then backtest it (potentially with other indicators) to see what works in your system.

Fibonacci retracements might not work best if traded solely on their own (from my experience) which is why I use this tool with other indicators and pieces in my overall analysis to give an extra edge in direction and potentially lower-risk entries.

Next page 👇


  • Mauk says:

    Nice job Olley 😀

  • paul the carpenter says:

    really enjoying and benefitting from this article- super appreciated Olley!

  • ben says:

    Super education ! Thanks Olley

  • IslandEyeTT says:

    Very beneficial series on Fibonacci retracement and extension tool! Thank you Olley!

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