fibonacci extension
The next use of Fibonacci you will be applying is that of targets. Let’s
start with an example in an uptrend.
In an uptrend, the general idea is to take profits on a long trade at a
Fibonacci Price Extension Level.
You determine the Fibonacci extension levels by using three mouse clicks.
First, click on a significant Swing Low, then drag your cursor and click on
the most recent Swing High. Finally, drag your cursor back down and click on
the retracement Swing Low. This will display each of the Price Extension
Levels showing both the ratio and corresponding price levels.
How to draw Fibonacci extension levels on a chart
On this 1-hour USD/CHF chart, we plotted the Fibonacci extension levels by
clicking on the Swing Low at 1.2447 on 08/14/05 and dragged the cursor to
the Swing High at 1.2593 on 08/15/15 and then down to the retracement Swing
Low of 1.2541 on 08/15/05. The following Fibonacci extension levels created
are 1.2597 (0.382), 1.2631 (0.618), 1.2687 (1.000), 1.2743 (1.382), 1.2760
(1.500), and 1.2777 (1.618).
Now let’s look at what actually happened after the retracement Swing Low
occurred.
-
The market
rallied to the 0.500 level
-
fell back
to the retracement Swing Low
-
then
rallied back up to the 0.500 level
-
fell back
slightly
-
rallied to
the 0.618 level
-
fell back
to the 0.382 level which acted as support
-
then
rallied all the way to the 1.382 level
-
consolidated a bit
-
then
rallied to the 1.500 level
You can see from these examples that the market often finds at least
temporary resistance at the Fibonacci extension levels - not always, but
often. As in the examples of the retracement levels, it should be apparent
that there are a few problems to deal with here as well. First, there is no
way of knowing which level will provide resistance. The 0.500 level was a
good level to cover any long trades in the above example since the market
retraced back to its original level, but if you didn’t get back in the
trade, you would have left a lot of profits on the table.
Another problem is determining which Swing Low to start from in creating the
Fibonacci Extension Levels. One way is from the last Swing Low as we did in
the examples; another is from the lowest Swing Low of the past 30 bars.
Again, the point is that there is no one right way to do it, and
consequently it becomes a guessing game.
Alright, let’s see how Fibonacci extension levels can be used during a
downtrend. In a downtrend, the general idea is to take profits on a short
trade at a Fibonacci price extension level since the market often finds at
least temporary support at these levels.
On this 1-hour EUR/USD chart, we plotted the Fibonacci extension levels by
clicking on the Swing High at 1.21377 on 07/15/05 and dragged the cursor to
the Swing Low at 1.2021 on 08/15/15 and then down to the retracement High of
1.2085. The following Fibonacci extension levels created are 1.2041 (0.382),
1.2027 (0.500), 1.2013 (0.618), 1.1969 (1.000), 1.1925 (1.382), 1.1911
(1.500), and 1.1897 (1.618).
Now let’s look at what actually happened after the retracement Swing Low
occurred.
-
The market
fell down almost to the 0.382 level which for right now is acting as a
support level
-
The market
then traded sideways between the retracement Swing High level and 0.382
level
-
Finally,
the market broke through the 0.382 and rested on the 0.500 level
-
Then it
broke the 0.500 level and fell all the way down to the 1.000 level
Alone, Fibonacci levels will not make you rich. However, Fibonacci levels
are definitely useful as part of an effective trading method that includes
other analysis and techniques. You see, the key to an effective trading
system is to integrate a few indicators (not too many) that are applied in a
way that is not obvious to most observers.
All successful traders know it’s how you use and integrate the indicators
(including Fibonacci) that makes the difference. The lesson learned here is
that Fibonacci Levels can be a useful tool, but never enter or exit a trade
based on Fibonacci Levels alone.
In short,
Fibonacci retracement levels are 0.236, 0.382, 0.500, 0.618, 0.764
Traders use the Fibonacci retracement levels as
support and resistance levels.
Since so many traders watch these same levels and place buy and sell orders
on them to enter trades or place stops, the support and resistance levels
become a self-fulfilling expectation.
Fibonacci extension levels are 0, 0.382, 0.618, 1.000, 1.382, 1.618
Traders use the Fibonacci extension levels as
profit taking levels.
Again, since so many traders are watching these levels and placing buy and
sell orders to take profits, this tool usually works due self-fulfilling
expectations.
In order to apply Fibonacci levels to your charts, you’ll need to identify
Swing High and Swing Low points.
A Swing High is a candlestick with at least two lower highs on both the left
and right of itself.
A Swing Low is a candlestick with at least two higher lows on both the left
and right of itself.
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