Fibonacci compression

The Fibonacci compression indicator scans historical price data to identify triangle formations that adhere to specific Fibonacci ratios, providing automated target levels based on trend-based extensions. By detecting compression patterns—characterized by lower highs and higher lows—the tool helps traders anticipate potential breakouts and manage exits using calculated take-profit zones.

Usage

The indicator automatically identifies key pivot points (Highs, Lows, Lower Highs, and Higher Lows) and plots them on the chart. Once a valid structure is identified, it projects three primary take-profit levels:

• TP1 (0.236 Ratio): Typically used for initial scaling out (e.g., closing 20% of the position).
• TP2 (0.618 Ratio): The main target level where a significant portion of the trade is often closed.
• TP3 (1.0 Ratio): Aimed for in scenarios exhibiting a very strong trend.

A red stop-loss line is automatically generated once the pattern is fully formed. Users should note that because the script focuses on the compression phase, projected levels may disappear once a breakout occurs; the use of the "Bar Replay" feature or manual Fibonacci extension tools is recommended to keep levels visible during the trade.

Details

The script operates by looking back over a user-defined number of bars to find a sequence of price legs that meet minimum Fibonacci retracement and extension requirements. It supports both bullish and bearish structures.

A unique feature of this tool is the integration of volume divergence. A volume label appears when a divergence is detected between price pivots (e.g., between a low and a higher low), utilizing a cumulative volume calculation. This feature is optimized for higher timeframes, specifically 4-hour charts and above, to filter out market noise.

Settings

General Settings

• How many bars to look back?: Determines the historical depth (default 300) used to identify the triangle formation.
• Search for bullish structures: A toggle to switch between searching for bullish patterns (checked) or bearish patterns (unchecked).
• Version: Select between Version 1 (standard) and Version 2 (includes risk-to-reward optimized entry calculations).
• Risk to reward (RRR): Used in Version 2 to calculate an "Optimal Entry" based on the desired RRR to hit TP1.

Fibonacci Thresholds

• Minimum fib level for 2nd leg: The minimum required retracement for the first secondary pivot.
• Minimum fib level for 3rd leg: The threshold for identifying the third pivot point.
• Minimum fib level for 4th leg: The threshold for identifying the fourth pivot point.
• Minimum fib level for 5th leg: The threshold for identifying the final pivot point in the compression.

FAQ

How do I interpret the volume labels?

Volume labels indicate a divergence between price action and cumulative volume at pivot points. While helpful for identifying potential exhaustion or strength, they should be used as a secondary confirmation rather than a standalone signal.

Why did the take-profit levels disappear from my chart?

The levels are programmed to display during the compression phase. Once the price breaks out of the identified pattern, the "compression" state ends. You can use the Bar Replay tool to see the levels again or manually draw them using the trend-based Fibonacci extension tool.

How can I access Fibonacci compression?

You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.