This article was written on the basis of one of the best Forex books.
Every trader knows about the Fibonacci levels (and if one does not know than this should be considered a serious draw down for any analysis he/she makes) and what they mean and about the now famous 61.8% retracement level or the golden ratio like it is being also called.
However, few consider other Fibonacci ratios for the simple reason that there are many interpretations depending on the trading theory used. For example, under the Elliott waves theory, the 61.8% retracement level is watched as being the typical level for the second wave and therefore a third wave (usually an extended one) should come. Third waves being powerful impulsive moves, everyone is looking to be part of such a move as reaching quick profits in as little time as possible has been every trader's dream since trading exists. Well, this is nothing but a trap as the 61.8% retracement most likely signals something else in the majority of cases and the ones always looking for the third wave are most of the times disappointed. Under the Gartley theory, the 81% retracement is typically being looked for the D wave in the ABCD pattern the theory is based on. And the examples may continue in the same direction as the previous ones only with the purpose of showing different interpretations of different Fibonacci levels.
This article is about a level less known or at least less used by traders and the most important thing to consider is that this retracement level is common for corrective waves that are being part of complex corrections. I am talking about the 38.2% retracement level.
It is well known the fact that price is spending most of the time correcting (or consolidating) so looking at possible levels when price should react has been the endeavor of every trader.
Whenever one is looking at an impulsive move and the fourth wave is about to come than it should be considered that price is rarely traveling beyond the 50% retracement level and the most likely place to react is the 38.2%. Of course, in trading one should not go for the exact level, but nevertheless the area should be considered. The chart below shows an hourly chart for the eurusd and there is a clear support at 38.2% retracement when looking at the fourth wave.
Complex corrections like triangles or double or triple combinations are being characterized by three waves moves of a lower degree and in this case 38.2% retracement is the level to look for whenever one wants to label a b or an x wave. In other words, let's say you are looking at a move that makes a new high or low, but the move is clearly a three waves move (so a corrective move). What does it mean? Well, first of all it means the previous highs/lows are going to be broken and that the 38.2% retracement level should be considered for price to resume the previous trend. The chart below depicts a eurjpy four hours chart and after the move to the upside made a new high in a corrective structure, now price is on 38.2% retracement area (classical for b waves or x waves, as explained above).
Traders always looked for support/resistance levels to enter a trade if only for their account to witness as little a drowdown as possible. Well, this 38.2% retracement level offer such a thing and this is why it should be treated with respect.