Determining support and resistance is quite a common problem faced by most traders. Some standard methods to determine support and resistance include trend lines, moving averages, super trend, Fibonacci retracement, etc.
Fibonacci extension is one way to find the support and resistance levels, but the use is not limited to that specific purpose. In this article, I will shed some light on the Fibonacci extensions, how they can be used, and the ultimate benefits and limitations of using them.
Fibonacci extension is formed by connecting three points, as opposed to Fibonacci Retracement, which is formed by connecting the lowest and highest points of a pre-defined trend and vice versa.
Let’s look at how to draw Fibonacci extensions in the case of an uptrend. You need to connect the lowest and highest points, and then if the price continues in the direction of the original trend after a retracement or correction, the low of the retracement or pullback would be our third point.
Assuming a currency moves from Rs 100 to Rs 200, then after a retracement to Rs 160, the currency moves back in the original trend direction. So the first point to draw Fibonacci extension would be 100, the second point would be 200, and the third point would be 160. This will show you where the currency is likely to face resistance shortly.
161.8%, 261.8%, and 423.6% are the most popular Fibonacci extension levels. Though the ratio may be slightly skewed at the start of the sequence, the above-proven ratio occurs as the number increases.
Though these are relatively far-off numbers, the other crucial Fibonacci extension resistance levels are 50%, 61.8%, 78.6%, and 100%; the derivation of these numbers is described in last week’s post on the Fibonacci retracement.
When the currency is trading at a lifetime high, and there is no prior resistance, you may use the Fibonacci extension to draw probable resistance levels.
In everyday life and nature, Fibonacci ratios may be seen in galaxy formations, architecture, shells, hurricanes, and some plants. As a result, some traders believe these common ratios may have significance in financial markets.
There is no formula for Fibonacci extensions. The trader chooses three points when the indicator is applied to a chart.
The first point chosen represents the start of a move, the second point represents the end, and the third point represents the end of the retracement against that move. The extensions then assist in projecting where the price may move next. Following the selection of the three points, the lines are drawn at percentages of that move.
On the below chart, extensions are drawn to represent potential price levels. These levels are based on Fibonacci ratios (as percentages) and the size of the price move to which the indicator is applied.
While the Fibonacci retracement offers traders important functional regions where a downturn may occur, the Fibonacci extension can help traders achieve their profit goals for their trend continuation entry orders. The Fibonacci extension levels are groups that exist beyond the 100% Fibonacci number system. The primary and most commonly used Fibonacci extension levels are 161.8%, 261.8%, and 423.6%.
The regular retracement strategy is the most common use for Fibonacci levels. After determining the ‘A to B’ move, you focus on retracement level C.
Traders frequently miss sudden outbursts and then attempt to re-enter during pullbacks. The sequence indicates that the Fibonacci tool is ideal for identifying swing points during pullbacks. A trader may have identified two Fibonacci re-entries on the pullbacks using the Fibonacci retracement tool.
Another possibility to use Fibonacci is to find for an AB-Fibonacci move on a higher timeframe, then move down to your standard timeframe and use the retracement levels as support and resistance guidelines.
Finally, Fibonaccis may be used for taking profit orders. The Fibonacci extensions, in particular, are ideal for determining profit levels in a trend. Fibonacci extension levels 138.2 and 161.8 are the most commonly used.
Custom levels may be added to the majority of trading platforms. Typically, the parameters used to add Fibonacci extensions are:
-0.618 for the Fibonacci extension of 161.8Forex technical analysis - All eyes on price movement — 2023
-0.382 for the Fibonacci extension of 138.2
Take profit orders have very individual rules; however, most traders use the following:
After breaking over the 0% level, 50, 61.8, or 78.6 retracements will frequently proceed to the 161 Fibonacci extensions. A 38.2 retracement will frequently halt around the 138 Fibonacci extensions.
Many traders use Fibonacci extensions to find trends that have completed an ABCD pattern and are likely to reverse. The Fib extension might be great in this help.
When the price is moving into an area where other methods of discovering support or resistance are not relevant or prominent, Fibonacci extensions can be used to construct price objectives or find projected areas of support or resistance.
If the price moves through one extension level, it may continue to move toward the next. Having said that, Fibonacci extensions may be of interest. The price may not stop or reverse at the level, but the region surrounding it may be necessary. For example, the price may move immediately past or slightly below the 1.618 level before shifting direction.
If a trader is long a currency and it makes a new high, the trader can use the Fibonacci extension levels to predict where the currency will go. The same holds true for a short trader. Fibonacci extension levels may be calculated to give traders ideas for profit target placement. The trader can then choose whether or not to cover the position at that level.
Fibonacci extensions may be employed in any timeframe or market. Typically, clusters of Fibonacci levels signal a price area that will be significant for the currency and traders in their decision-making. Because extension levels can be drawn on different price waves throughout time, it might be a critical area when many levels from these waves converge at one price.
While extensions represent where the price will move after a retracement, Fibonacci retracement levels reveal how deep the retracement might be. In other words, Fibonacci retracements measure trend pullbacks, and Fibonacci extensions measure impulse waves in the trend’s direction.
Fibonacci extensions should not be used to decide whether to purchase or sell a currency. Investors should determine extensions with other signs or patterns when determining one or more price objectives. Candlestick patterns and price movement are beneficial when determining whether a currency is likely to reverse at the target price.
There is no guarantee that the price will reach or reverse at a particular extension level. Even if it does, it is unclear which Fibonacci extension level will be necessary before entering a trade. The price might quickly move through several levels, or it could fail to reach any of them.
Though Fibonacci is a valuable approach for chart analysis, it does not offer a specific entry point but rather an anticipated entry region. Furthermore, there is no certainty that the price will reverse from any given Fibonacci extension level. Therefore, you should use it in conjunction with other technical parameters as confirmation.
Also see Fibonacci time extensions and Fibonacci retracements, which form part of the Fibonacci tools.
To create a Fibonacci extension, select this object and mark the beginning point of the first wave on the chart. The second point of the first wave should then be defined. To draw the second wave, click on the second point of the first wave and hold down the mouse button.