Fibonacci Retracements
Fibonacci retracements rely on an 800-year-old mathematical sequence to answer a concrete trading question: how far can a price pull back before resuming its trend? The key levels (38.2 %, 50 %, 61.8 %, 78.6 %) serve as likely support zones in an uptrend (or resistance in a downtrend). It is not a strictly predictive indicator — it is a structural tool that helps identify entry points with controlled risk on pullbacks.
Definition and formula
The Fibonacci sequence (0, 1, 1, 2, 3, 5, 8, 13, 21, 34, ...) generates the golden ratio φ ≈ 1.618. Retracement levels derive from ratios between successive terms:
38.2 % = 1 − 0.618 (complement)
50 % = empirical ratio (Dow Theory)
78.6 % = √(0.618) (used for extensions)
23.6 % = shorter ratio (light technical bounce)
To apply Fibonacci retracements, identify a swing high (point A) and a swing low (point B), then draw the 23.6 / 38.2 / 50 / 61.8 / 78.6 % levels between these two extremes. Price tends to react to these levels as a buy zone (bounce) or profit-taking zone depending on the swing direction.
How to read the retracements
Uptrend: pullback zones
- 23.6 % — shallow pullback. Very strong trend, few investors are taking profits. Cautious entry, tight stop.
- 38.2 % — classic retracement of a healthy trend. Good long entry zone to follow the trend.
- 50 % — substantial pullback but consistent with a forming trend. Statistically the most tested zone.
- 61.8 % ("golden ratio") — deep retracement. Beyond this, the risk that the trend reverses increases. Long entry only if confluence with other signals (RSI exiting oversold, volume).
- 78.6 % — very deep retracement. Often the last acceptable entry point before considering the trend as broken. If price crosses 78.6 %, wait for confirmation of a new setup before engaging.
Downtrend: technical bounce zones
In a downtrend, the same levels act as resistance. A bounce that fades at the 38.2 % or 50 % level typically gives a short or hedge point on the bounce. Beyond 61.8 %, the bounce is no longer a simple technical pullback but often the start of a reversal.
How Cash Scanner uses Fibonacci
Cash Scanner integrates Fibonacci through 2 binary indicators in the /100 score:
- fib_support — current price is near a Fibonacci level acting as support (in an uptrend, retracement between 38.2 % and 61.8 % from the recent swing high). Score bonus that rewards pullbacks with favorable risk/reward.
- fib_resistance — price is hitting a Fibonacci level in a downtrend (bounce stalling around 38.2-61.8 %). Caution signal: avoid impulsive long entries.
- Momentum Mode: a
fib_supportcombined with an RSI exiting oversold and a bullish MACD forms highly valued confluence — the scanner prioritizes setups where Fibonacci offers natural support to a bullish reversal signal. - Phoenix Mode: deep retracements (61.8-78.6 %) accompanied by bullish divergences are particularly valued — these are setups where risk (stop below the swing low) is limited and potential reward (return to the swing high) is high.
Limits and common pitfalls
- The choice of A/B swings is subjective: depending on the time-frame and observed window, two traders can identify different levels for the same asset. Cash Scanner uses 100-day swings by default, but 20/50/200 days produce different maps.
- Not a strictly predictive indicator: Fibonacci has no statistical value in the strict sense — it partly works as a self-fulfilling prophecy (many traders watch them). On a thinly-followed asset, the levels have less power.
- False signals in consolidation: on a pure ranging asset, drawing Fibonacci between the range high and low produces meaningless levels — no trend, no pullback to measure.
- Confluence required: Fibonacci alone is too subjective to serve as an entry signal. Systematically combine with RSI, MACD, volume, or another objective support point (moving average, prior horizontal support).