Trading the 0.786 and 0.886 Fibonacci retracement levels isn’t a strategy with an exceptionally high win rate.

 Trading the 0.786 and 0.886 Fibonacci retracement levels isn’t a strategy with an exceptionally high win rate.

But there’s a clear reason to consider the risk-to-reward ratio at these levels. It’s not because price is guaranteed to bounce. It’s because these levels can make it easier to compare a clear exit point if you’re wrong with a potential target if you’re right.

Let’s start with the numbers.

For an upward price move, the 0.786 and 0.886 levels represent retracements of 78.6% and 88.6% of that move. In other words, price has dropped back close to the previous low.

If that previous low is the level that invalidates your trade setup, entering here can put your entry closer to your stop than chasing price near the high would.

But being close to the low means two things: it could be an opportunity to buy at a lower price, or it could mean the existing bullish structure is on the verge of breaking down.

A deeper retracement does not automatically mean a higher probability of a bounce.

Let’s look at an example.

Suppose price rises from 100 to 200. The 0.886 retracement level would be 111.4.

If you buy there, set your stop at 99, and target the previous high of 200, the math looks like this:

• Potential loss: 12.4
• Potential profit: 88.6
• Potential reward for every 1 unit of risk: approximately 7.15

That’s a reward-to-risk ratio of over 7 to 1. If you also factor in your assessment of the trend, you might decide, “Price probably won’t make it all the way back up there,” and take profits earlier. But we’re not going that deep into it right now, so let’s leave that aside.

Just remember this: buying close to a low and selling close to a high can offer a very favorable risk-to-reward ratio because your stop is nearby. The hardest part is waiting for price to reach those levels. But if you can develop that patience, your trading account will undoubtedly grow over time.

I’ll wrap things up by showing you some examples of trades at the 0.786 and 0.886 levels. Personally, I use the 4-hour chart or higher timeframes for these trades!