"INDICATOR OF THE DAY" - 78.6% FIBONACCI RETRACEMENT
We often talk of the importance of using Fibonacci retracement levels as a tool to help traders better gauge potential shifts within the market. Today, we will look at our favorite retracement level in the form of the 78.6% Fibonacci retracement. The 78.6% fib retracement is arguably the last relevant retracement level and last chance for a given move to stall out and resume the underlying course of the trend before considering a full 100% retracement. As such, establishing reversal positions off of the 78.6% fib will often present highly compelling risk/reward trade set-ups.
In the above example, we can see that Gbp/Aud has stalled out by the 78.6% retrace off of the 1.9700-2.0600 move in the 1.9900 area, and could be looking to bounce ahead of the +12 year lows. If this is the case, establishing a long by the 78.6% fib and setting a stop-loss below the mutli-year lows, sets up a very compelling trade, risking just over 21.4% of the respective move for a potential reward of 78.6% or greater.
Written by Joel Kruger, Technical Currency Strategist for DailyFX.com
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