61.8% Retracement
The 61.8% retracement is known as the golden retracement. It comes directly from the golden ratio, where 1 divided by 1.618 equals 0.618. This is the most common target for Wave 2 corrections and represents the deepest typical retracement before the next impulse wave begins. Wave 2 corrections that reach 61.8% and hold are textbook setups. The deep pullback shakes out weak hands who entered during Wave 1, creating the fear and doubt that fuels Wave 3. If you can buy at the 61.8% retracement of Wave 1 with a stop just beyond the 100% level (the start of Wave 1), your risk-to-reward ratio is outstanding because Wave 3 is typically the longest and strongest wave. The 61.8% level is also significant for Wave C targets within corrections and as a general support and resistance level across all timeframes. When price reaches 61.8% and momentum indicators show bullish or bearish divergence, the probability of a reversal increases substantially. This is one of the highest-conviction levels in all of Fibonacci-based trading.
Google rallies from $140 to $170 in Wave 1, a $30 gain. Wave 2 pulls back. The 61.8% retracement sits at $151.46 ($30 x 0.618 = $18.54 below $170). Price drops to $152, just above the golden retracement. A hammer candlestick forms on the daily chart. RSI dips to 35 without going oversold. A trader enters long at $152 with a stop at $139 (just below the Wave 1 origin). If Wave 3 extends to 161.8% of Wave 1, the target is $200.54. That is a $48 reward for $13 of risk, nearly a 4-to-1 ratio.