Fibonacci Extension Targets From a Pullback

[Fairman]

Fibonacci Extension Targets From a Pullback

Using the same market, the swing ran from 1.0800 to 1.0900. Price then pulled back to 1.0850 and turned up. You want targets beyond the old high.

An extension projects the original swing length from the pullback low. The swing is 100 pips. At 127.2 percent: 127.2 pips above 1.0850 is 1.09772, so 1.0977. At 161.8 percent: 161.8 pips above 1.0850 is 1.10118, so 1.1012. At 100 percent, which is a measured move: 1.0950.

Now evaluate. Entry on a break above 1.0900 at 1.0903, stop below the pullback low at 1.0846, risk 57 pips. First target 1.0950, reward 47. Second target 1.0977, reward 74. Third target 1.1012, reward 109.

Ratios: 0.8, 1.3, and 1.9. Only the furthest comes close to attractive, and it is the least likely to be reached.

So what does the exercise tell you? That an entry on the breakout has a poor ratio, because the stop is far. If you entered at the pullback low area instead, say at 1.0855 with a stop at 1.0846 (9 pips), the same targets give ratios of 10.5, 13.6, and 17.5. Entering early costs you the confirmation and gains you the ratio.

Neither is right in every case. Confirmation reduces failure rate, early entry improves reward.

Before relying on extensions, check whether each level lines up with real structure, like a prior high or round number.

Try this: compute the ratios for both entry styles on your own last breakout trade.

[FXS Prop Desk]

Fairman, the worked extension example makes the arithmetic clear. One practical note for readers: the 127.2 and 161.8 levels are only useful if they line up with something else, such as a previous swing or a round number. Treating them as standalone targets tends to give exact numbers that the market has no reason to respect.

[Fairman]

The ratio comparison is the most useful part of the exercise. With a breakout entry at 1.0903 and a stop at 1.0846, the 57 pip risk makes even the 161.8 percent target only a 1.9 ratio. The early entry at 1.0855 with a 9 pip stop gives ratios above 10, but a 9 pip stop on EUR/USD sits within ordinary noise on most timeframes and would be hit very often. So the real comparison isn't the ratios alone; it's ratio times win rate. Neither entry style can be judged without knowing how often each one reaches its targets, which needs testing on past swings.

[Amanhasnoname]

I tested extensions on about twenty of my own pullback trades on GBPUSD and EURUSD, and I agree that the ratio comparison is the real lesson in this example. My finding was that the 127.2 level was reached on roughly half of the trades that started well, while 161.8 was reached on only a handful, so the best looking ratio belonged to the target I almost never saw.

What changed my results was placing the stop by structure rather than by a fixed distance. In the post the stop sits just under the pullback low, and I started adding a few pips of room and then reducing the size so the dollar risk stayed the same. The wider stop kept me in more trades that would have been stopped by ordinary noise, which a nine pip stop on EURUSD would not survive.

For targets I take half off at the measured move, move the stop to the entry, and leave the rest for the 127.2 area only if the chart also shows an old swing high near it.

[Fairman]

Checking whether extension levels line up with real structure is good advice. The 1.1000 level, a big round number, sits just below the 161.8 percent extension at 1.1012, so many traders would likely place orders around 1.1000. That could make it a more realistic target than the precise Fibonacci figure. Similarly, if a previous swing high sits near 1.0977, the 127.2 percent level gains credibility. Where an extension falls in empty space with no other reason for price to react, it's just a number. Combining extensions with structure tends to give more reliable targets than using either alone.

[Fairman]

A middle path between the two entries is often worth considering. Some traders wait for a lower timeframe confirmation near the pullback low, such as a bullish engulfing candle on the 15 minute chart, and place the stop below that candle. The entry might be around 1.0865 with a stop at 1.0845, a 20 pip risk. Against the 1.0977 target, that's a ratio of about 5.6, with some confirmation that buyers have stepped in. It sacrifices part of the ratio for a better chance of success, which is the same trade off as before, just at a different point on the scale.