Using Ichimoku special Fibonacci retracements

Fibonacci retracements are a technical analysis tool widely used by traders to identify potential support and resistance levels. When combined with the Ichimoku Kinko Hyo, these retracements can add a layer of confirmation and precision to your trading decisions. In this article, we'll explore how to use Fibonacci retracements in conjunction with the Ichimoku Kinko Hyo to spot reversal and continuation zones in the market.

Ichimoku Kinko Hyo components

The Ichimoku Kinko Hyo consists of five essential lines, each with a specific function to help analyze trends and levels of support/resistance:

1. Tenkan-sen (Conversion Line) Average of highs and lows over the last 9 periods. This line represents a fast-moving average and is useful for identifying short-term trends.

   Formula: (9-period high + 9-period low) / 2

2. Kijun-sen (Base Line) Average of highs and lows over the last 26 periods. It is a slower moving average and serves as a reference for medium-term trends.

   Formula: (26-period high + 26-period low) / 2

3. Senkou Span A (Relaxation Line A) Average of Tenkan-sen and Kijun-sen, projected 26 periods into the future. It forms one of the two bounds of the Kumo (cloud) and helps anticipate future support and resistance zones.

   Formula: (Tenkan-sen + Kijun-sen) / 2, projected 26 periods into the future

4. Senkou Span B (Relaxation Line B) Average of highs and lows over the last 52 periods, projected 26 periods into the future. It forms the other boundary of the Kumo and, together with the Senkou Span A, defines the cloud's support/resistance zone.

   Formula: (52-period high + 52-period low) / 2, projected 26 periods into the future

5. Chikou Span (Delay Line) Current closing price: Represents the current closing price, projected 26 periods into the past. This line can be used to confirm trends by comparing current prices with past prices.

   Formula: Current closing price, projected 26 periods in the past

Using Fibonacci retracements

Fibonacci retracements are used to identify areas where the price could recover after an upward or downward movement. The most common levels are 23.6 %, 38.2 %, 50 %, 61.8 %, and 78.6 %. These levels are used to identify support or resistance zones where a reversal is likely to occur.

Integrating Fibonacci Retracements with Ichimoku

Ichimoku Kinko Hyo and Fibonacci retracements can be combined to improve the accuracy of trading signals. Here's how to use these two tools together:

1. Identifying Trends with Ichimoku :

   • If the price is above Kumothe trend is upward.
   • If the price is below Kumothe trend is downward.
   • If the price is in KumoThis means a consolidation phase, where trends are uncertain.

2. Using Fibonacci Levels to Find Turning Zones :

   • Plot the Fibonacci retracement levels between a low point and a high point (for an uptrend) or between a high point and a low point (for a downtrend).
   • Fibonacci levels can coincide with Ichimoku lines, such as the Kijun-senthe Tenkan-sen or the Kumo. These points of convergence can signal areas where the price could potentially rebound or turn around.

3. Confirming Signals with Ichimoku :

   • For example, a 61.8 % retracement level aligned with the Kijun-sen or an edge of the Kumo may offer particularly strong support or resistance. In this case, if the price reacts around this level and the Ichimoku confirms the trend (for example, with a Tenkan-sen/Kijun-sen cross), you have a reinforced trading signal.
   • The Chikou Span can also be used to confirm signals. If the Chikou Span is above the price (in an uptrend) or below the price (in a downtrend), it reinforces the signals from Fibonacci retracement levels.

Practical examples

Example 1: Uptrend and Fibonacci retracement

1. Analysis The price has recently made a bullish move. You trace the Fibonacci levels between a significant low and high point.

2. Observation The 38.2 % retracement level coincides with the Kijun-sen and the lower edge of the Kumo.

3. Action If the price rebounds to this level and the Tenkan-sen crosses over the Kijun-senyou can enter a long position with a stop-loss just below the Kumo and a target based on the next resistance level.

Example 2: Bearish trend and Fibonacci retracement

1. Analysis : The price has made a significant decline. You plot the Fibonacci levels between a high and a low.

2. Observation The 61.8 % retracement level corresponds to a resistance point on the Kumo.

3. Action If the price reaches this retracement level and the Tenkan-sen crosses below the Kijun-senyou can enter a short position, with a stop-loss above the Kumo and a profit target towards the next support.

Conclusion

The combined use of special Fibonacci retracements with the Kinko Hyo Ichimoku enhances your trading strategies by offering more reliable signals and more precise entry and exit zones. Fibonacci retracements help identify potentially important reversal or continuation zones, while Ichimoku provides crucial information on market trend and support/resistance levels. By combining these tools, you can improve the quality of your trading decisions.

As always, it's important to test these techniques on a demo account before applying them in real trading, and to use them in conjunction with other analyses to validate your decisions.