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How to Use Fibonacci Retracements in Harmonic Trading

Updated on December 19, 2012

Fibonacci Retracement of the Pre-ABC Move

When analyzing an ABC pattern for harmonic trading purposes, fibonacci retracements are a key component of the analysis.

The first step is to use the fibonacci retracement tool to identify the retracement levels of points A and C. They should be near to one of the key fibonacci ratios: 38.2%, 50%, 61.8%, 70.7%, 78.6%, or 88.6%.

Fibonacci Retracement of 0-X Move

Bearish Gartley Pattern
Bearish Gartley Pattern

External Fibonacci Retracement of Wave B

The second step is to use the retracement tool to draw an external retracement (which is greater than 100%) of wave B. Use the common fibonacci ratios of 113%, 127.2%, 141.4%, and 161.8%.

External Retracement of Wave B

External Retracement of Wave B
External Retracement of Wave B

Fibonacci Projection of Wave A from Point B

The third step is to examine the size of wave C relative to wave A. To do this, some charting packages have a projection tool, or a retracement tool can be used on wave A, and then moved to begin at point B.

Use the projections of 78.6%, 88.6%, 100%, 113%, and 127.2% as possible projections of wave A to predict the likely end of wave C.

Using a Fibonacci Projection of Wave A

Fibonacci Projection of Wave A from Point B
Fibonacci Projection of Wave A from Point B

Looking for an Area of Confluence

Now that you have made these 3 fibonacci studies on the chart, you can look for areas of overlap. The best harmonic trading patterns will have 3 lines in very close proximity on the chart, indicating a fibonacci harmonic pattern in every facet.

In this example of CHK, notice the close proximity of the 78.6% retracement of the 0-X move, the 127.2% external retracement of wave B, and the 100% projection of wave A (in pink) up from point B. That tight confluence zone is the most probable price reversal zone for the stock.

Fibonacci Confluence Zone

An area of fibonacci confluence at point C
An area of fibonacci confluence at point C

How to Use Fibonacci Retracements in Harmonic Trading Video


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