Mastering Fibonacci Extensions: A Trader’s Guide to Precision Analysis and Targets

Take note that after the marked blue base line, the price starts a sharp increase which reaches the 261.8% extension area. Notice that the price creates a couple of tops there (black arrows), which shows that the price is clearly finding resistance at this level. After the second interaction with the 261.8% level, the price creates another bounce and a tradeable opportunity. The first thing you need to do is to find a trend or swing you want to use as a base. The size of this leg will be used to position the Fibonacci levels including the extensions. Every level you see on the chart will be based on the selected leg.

  1. I have placed a Fibonacci retracement on a small bullish trend in the upper left corner.
  2. Fibonacci retracements can be used to place entry orders, determine stop-loss levels, or set price targets.
  3. Although price movements sometimes seem to align with Fibonacci levels and ratios, they don’t work perfectly in all situations or for all assets.
  4. Actually, financial markets have the very same mathematical base as these natural phenomena.

The concept is that these curves may act as potential levels of support and resistance for the price. Once a significant price move has occurred, such as a breakout from a consolidation range, traders can use Fibonacci extensions to project potential price targets for the next phase of the trend. While extensions show where the price will go following a retracement, Fibonacci retracement levels indicate how deep a retracement could be.

The Difference Between Fibonacci Extensions and Fibonacci Retracements

These lines anticipate the support and resistance levels, as well as trading ranges. This is the 10-minute chart of Twitter from Aug 27 – Sep 4, 2015. In the beginning of the chart you will see a small bearish trend.

So, this is the mathematical basis for the 23.6%, 38.2%, and the 61.8% Fibonacci ratios within the sequence. The 50.0% is simply the midpoint of 0% and 100%, which is another level that tends to have an impact on price action but is not actually a Fibonacci number. As you probably know, Fibonacci levels help us measure the size of the current price move compared to the previous leg. Typically, when measuring for internal Fibonacci retracements, we are looking for corrective price moves within a larger trend.

In that case, it has retraced 23.6%, which is a Fibonacci number. Therefore, many traders believe that these numbers also have relevance in financial markets. In addition to price levels, Fibonacci ratios can also be applied to time.

Some traders believe these retracement levels align with natural price movements and can offer insights into potential entry or exit points. The first step in drawing fibonacci extension levels is to identify two clear swing points. These point should be in relation to both your current timeframe and length of trend. In the below example we will be reviewing the fibonacci extension levels for Provident Bankshares (PBKS). Once PBKS exceeded this prior swing high, the stock began an impulsive move up that would not face any real resistance until achieving its 261.8% retracement level. Fibonacci retracements are useful tools that help traders identify support and resistance levels.

Not covered much in the trading community is the impact or rather influence Fibonacci extensions have on day trades and how to trade Fibonacci extensions. In this article, we are going to cover foundational topics related to Fibonacci extensions and how you can incorporate straightforward tactics into your trading regiment. Start this grid at the breakout price, stretching it higher until it includes the Fib ratios likely to come into play during the life of the trade. Now move to shorter-term trends, adding new grids for those time frames. Once completed, your chart will show a series of grids, with lines that are tightly aligned or not aligned at all.

Fibonacci levels are also often combined with the Elliott Wave Theory to find correlations between wave structures and potential areas of interest. This can be a powerful strategy to predict the extent of retracements in different waves of a particular market structure. What’s more, it’s been used by artists, engineers, and designers for centuries to create aesthetically pleasing compositions.

Numbers First Formulated in Ancient India

That said, there are two basic strategies you must know when utilizing the Fibonacci retracement tool – range and breakout trading. Notice how the price dips through the Fibonacci Retracement level, presenting us with the buy entry at the 61.8% Fib level. So, here are some tips and rules to draw the Fibonacci retracement lines correctly on a trading chart. When you see high volume, this means bulls and bears are fighting against one other for market dominance. Once one side prevails, the trend will likely follow in their desired direction. Therefore, if there is strong volume in conjunction with a Fibonacci extension breakout, this gives us further validation of our trading signal.

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When I see an extension break, I need the two KST lines to cross upwards in order to go long. Conversely, I need the two KST lines to cross downwards to go short. We hold the position as long as the KST supports the price direction. We exit the market when the KST lines cross in the opposite direction.

Similar integer sequences

However, some mathematicians have stated that the importance of this ratio is wildly exaggerated. Thus, the best strategy is combining Fibonacci extensions, KST and the volume indicator. In this Fibonacci retracement strategy, I will combine Fibonacci extension breakouts with buy/sell signals from the KST indicator. The methodology behind this trading strategy is to confirm breakouts above or below Fibonacci extensions with the awesome oscillator (AO). Whether or not Fibonacci levels are accurate will depend on the study and the specific trader.

What Is the Relationship Between the Fibonacci Series and the Golden Ratio?

All these fancy numbers can make your head spin, and that’s where many people make mistakes – in drawing Fibonacci levels on the chart. Okay, you might be thinking, this is all very interesting, but what does it have to do with trading? In the 1970s, some investors thought of applying the Fibonacci sequence to the stock market. They had a theory that stock patterns might follow the natural ecosystem. So, they used the Fibonacci retracements to apply these Fibonacci numbers to their charts.

In this section, we are going to go step-by-step and use Tradingview to demonstrate the process. Note that you can also try it on MT4/MT5, or any other platform you are using to trade. Additionally, if you want to check the specific steps on how fibonacci extension formula to use the Fibonacci Retracement tool, just go through the section below. Check our video on how to use the Fibonacci Retracement Tool and go through the correct application of Fibonacci retracements on both the MT4 and Trading View platforms.

Again, the idea behind Fibonacci fans is that these lines act as potential support and resistance levels for price as it moves across the chart. Fibonacci retracement levels provide areas or zones where the price trend could potentially pause and from there, continue or reverse. They are often used as a go-to technical analysis tool for many traders. Now, in essence, Fibonacci retracement ratios work on the sequence of numbers and are often used as a go-to technical analysis tool for many traders. The levels above provide areas or zones where the price trend could potentially pause and from there, continue or reverse. The last part of the fibonacci extension equation, is what to do when the asset hits the respective target.

The Fibonacci retracement levels are all derived from this number string. After the sequence gets going, dividing one number by the next number yields 0.618, or 61.8%. Divide a number by the second number to its right, and the result is 0.382 or 38.2%.

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