the hAnDbook oF teChnICAl AnAlysIs
10.14 Probability of Continuation and Reversal in Fibonacci Retracements and Extensions
The amount of retracement is considered to be an indication of the probability of
price continuation. For example, in a very strong uptrend, price is not expected to
correct more than 38.2 percent of the price range, otherwise it would be an indication
that the uptrend may not be as inherently bullish as originally envisaged. Any correc-
tion should be followed a quick and sharp pullback resulting in the resumption of
the predominant trend. A 50 percent correction is still considered a bullish indication,
with more upside expected in price. In fact, the 50 percent retracement is considered
the most important retracement level by the majority of traders, as it coincides with
most of the psychologically significant and attractive retracement percentage levels.
Conversely, in a weak uptrend, it is not unusual for price to correct more deeply
and over a longer period. In fact, the deeper the correction, the lower will be the prob-
ability that a trend would resume within a reasonable period. For a downside Fibo-
nacci retracement, deep corrections transform all previous Fibonacci support levels
into resistance! The resumption of any upside move must first be able to penetrate the
23.6 percent, 38.2 percent, 50 percent, and 61.8 percent Fibonacci retracement levels
before any continuation of the predominant trend is possible. See Figure 10.50.
10.15 Fibonacci‐Based Entries, Stoplosses, and Minimum Price Objectives
Fibonacci levels are in essence mathematically derived support and resistance levels.
Just like conventional support and resistance, Fibonacci levels are static and are not
time dependant, that is, they do not vary with time, as they are horizontally orientated.
Figure 10.50 Probability of Continuation in a Retracement.
