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The Importance of 78.6 and 88.6 Fib Retracement

May 10, 2018 15:30

The Fibonacci school of technical analysis has an underlying assumption that history always repeats itself, and is based on the historical movement of the underlying market. At the end of the thorough technical analysis, a trader plots Support & Resistance that usually involves Fibonacci numbers. In this article, we will discuss Fibonacci retracement levels 78.6 and 88.6 in the various ways that determine critical Support & Resistance (S&R) levels. These levels are helpful to both novice and experienced traders.

The Fibonacci Tool During Trends

Remember that the Fibonacci (Fib) retracement tool is used only during trending periods. We always chart it from left to right. As mentioned earlier, Fibonacci numbers provide excellent entry points during trending markets. They signal the reversal points for traders to find entries during retracements in a trend.

During intensive trading in the financial markets, I've noticed that the Fibonacci sequence levels are also valuable when plotted on the charts on time frames higher than 30 minutes. The Fibonacci sequence levels of 78.6 and 88.6 indicate deeper retracement and are usually great entry points.

Adding each Fibonacci sequence level on the chart manually is very important as traders assess highs and lows of the underlying market through the subjective approach.

Take a look at the chart below and see how the price reacts at 78.6 and 88.6 fib levels:

Source: EUR/USD Admiral Markets MT5, MT5SE add-on H1 chart, Apr 2018

The same 78.6 and 88.6 levels are valid as long as the price keeps trending, which means it does not retrace deep enough to hit or touch the 100 % Fib retracement. As soon as the price hits the 78.6 and 88.6 levels, we might consider a trade in the trend direction. The price should continue following the trend.

Remember, Fibonacci retracement is plotted from left to right. This principle never changes.

The Importance of the 78.6 and 88.6 Fibonacci Retracement

Simply put, who wouldn't want to get a 78.6% or 88.6% price reduction?!

Imagine yourself in a store, the salesperson saying all of a sudden: "All our goods are available at a 88% discount!" Guess what? Buyers step up, at least some. The same principle can be used in the world of Forex trading. This simple market psychology is valid for the financial markets as well – if you know how to apply the Fibonacci tool correctly.

Fibonacci levels give traders an opportunity to join a trend at a discount and ride the continuation of the trend. Have you ever heard of the expression "sell the rallies, buy the dips"? Fibonacci traders combine both the 88.6% and 78.6% Fibonacci retracements to highlight a hot spot trading zone where high probability trades are more likely to take place. Indeed, the zone between the 78.6% and 88.6% Fibonacci retracements is a hot-spot trading zone.

New research on this subject claims that the golden ratio – 1.618 – can be applied not only to mathematics, but also to physics, chemistry, biology, and the topology of space-time. Spiral galaxies, such as our Milky Way, also follow the familiar Fibonacci pattern. The Milky Way galaxy has several spiral arms, each of them a logarithmic spiral of about 12 degrees. As an interesting side note, spiral galaxies appear to defy Newtonian physics. As early as 1925, astronomers realised that, since the galaxy's angular speed of rotation varies in distance from the centre, the radial arms should curve.

Source: GBP/JPY Admiral Markets MT5, MT5SE add-on, H1 chart, Aug 2018

The significance of the square root of .618 is .786. That corresponds to 78.6% Fib retracement. The square root of 0.786 is 88.6 % Fib.

  • Square root of 61.8 = 78.6;
  • Square root of 78.6 = 88.6;
  • Square root of 88.6 = 94.2;
  • Square root of 2 = 1.4142.

In times of high volatility trading, the price tends to respect 78.6 and 88.6 to a great extent. There is a connection. That is why 78.6 and 88.6 are extremely important in my trading. Remember, price action in Forex repeats itself. That's a unique advantage of the Forex market compared to other financial markets.

Now, you should have a new tool at your disposal. Make sure to use it wisely and to your advantage.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.