Fibonacci 78.6% Reversal

Entry Logic

• Enter long on a bounce off the 78.6% Fibonacci retracement level of a prior uptrend.
• Confirmation is a bullish candlestick pattern, such as a piercing line or bullish engulfing bar.
• Use a 4-hour timeframe for this setup.
• Entry should be above the high of the confirmation candle.
• This setup works best in a strong trending market that is experiencing a deep pullback.

Exit Logic

• The profit target is the previous high of the uptrend.
• Scale out 50% at the 38.2% Fibonacci level.
• Trail the remaining position with the 50-period SMA.
• Exit if price closes below the low of the pullback.
• Exit on a confirmed bearish reversal pattern.
• Exit if the trade is not profitable within 10 days.
• Exit if the MACD shows a bearish crossover.

Stop Loss Structure

• Place a hard stop below the low of the pullback.
• A soft stop is a close below the 78.6% Fibonacci level.
• Maximum dollar loss is $1500 per trade.
• Maximum percent loss is 3% of the account.
• The structural stop is below the low of the confirmation candle.

Risk Management Framework

• Risk 2% of the account per trade.
• Daily loss limit is 6% of the account.
• Weekly loss limit is 12% of the account.
• Maximum drawdown is 35%.
• Minimum risk-reward ratio is 2.5:1.

Position Sizing Model

• Use a fixed fractional sizing model.
• Adjust size based on the distance to the stop loss.
• Use 1.25x size for A+ setups.
• Do not scale into trades.
• Scale out at the 38.2% Fibonacci level.

Trade Filtering

• Avoid trading this setup in a ranging market.
• Requires a clear uptrend and a deep pullback to the 78.6% level.
• Trade only instruments that respect Fibonacci levels.
• Avoid trading this setup during low-volume hours.
• Do not trade in choppy, sideways markets.

Context Framework

• The daily chart should show a clear uptrend.
• Price should be trading above the 200-day SMA.
• The setup should occur at a confluence of support levels.
• The weekly chart should show a bullish bias.

Trade Management Rules

• Move the stop to breakeven after the first profit target is hit.
• Scale out 50% at the 38.2% Fibonacci level.
• Do not add to winning trades.
• Be patient and let the trend resume.

Time Rules

• The optimal time to trade this setup is during the main session of the instrument.
• Avoid trading this setup on Mondays.
• The trade can last for several days to weeks.

Setup Classification

• A+ setup: Perfect bounce off the 78.6% level, strong confirmation candle, high volume.
• A setup: Bounce off the 78.6% level, moderate confirmation candle, average volume.
• B setup: Weak bounce, no clear confirmation, low volume.
• C setup: No clear setup, avoid.

Market Selection Criteria

• Trade forex pairs, commodities, and stock indices.
• The instrument should have a history of trending well.
• The instrument should have a high level of liquidity.

Statistical Edge Metrics

• Expected win rate is 55%.
• Average win is 4R.
• Average loss is 1R.
• Profit factor is 2.2.
• Expectancy per trade is 1.2R.

Failure Conditions

• The strategy fails if the low of the pullback is breached.
• A common failure is a failure to make a new high after the entry.

Psychological Rules

• Have the courage to buy a deep pullback in a strong trend.
• Do not be afraid of the market going against you initially.

Advanced Components

• Use a volume profile to identify high-volume nodes at the 78.6% level.
• A trend strength indicator can help confirm the uptrend.
• Avoid trading this setup on correlated instruments.
• The daily chart must confirm the uptrend.

Location

• The setup is strongest when it forms in a well-established uptrend.
• The setup is weakest in a choppy, sideways market.
• The location of the 78.6% level in the overall trend is important.