Fibonacci extensions are typically for a couple of things. We use them to find areas of confluence (which we’ll get to later) and to look for predictive price movement. If the market has started moving in a trend we typically look to take some profits at Fibonacci Price Extension Levels.
In the simpliest terms, Fibonacci Extensions are an extension of the Fibonacci Retracement tool above the standard 100% level. If the market has started moving in a trend we typically look to take some profits at Fibonacci Price Extension Levels. We can also use Fibonacci extensions to forecast areas of support or resistance.
The way we plot Fibonacci extension levels is with three mouse clicks.
First, we click on a significant Swing High or Swing Low, and then we drag our cursor and click on the most recent Swing High or Swing Low. Finally, drag your cursor back down and click back on the retracement Swing High or Swing Low. This will display the Price Extension Levels showing both the Ratio and corresponding prices.
CLICK ON IMAGES TO EXPAND
|Here is an example on BIDU of drawing a Fiboncci extension from the Swing High to Swing Low and projecting targets. In this example you can see that we took the High Swing from around the end of October to the Low Swing which occured in April of 2008 and the extension tool was able to help us predict the continued movement of BIDU down to the 141.67 Extension Level.
|Another example is on this DBA Daily Chart. You’ll notice that we were able to use the Fibonacci Extension tool to project where the price was going for targets.Again, you’ll notice that it doesn’t matter which market or timeframe we look at. The Fibonacci Extensions work when properly used.|
|Here is an example of projecting a target and a reversal area in the USD/JPY. Here you can see we ran the Fiboncci Extension from early April to the end of May and as a result we were able to predict the drop right to the 127.20 Extension level.|