Fibonacci Extensions go beyond the standard Fibonacci retracement levels to project potential price moves in the direction of the prevailing trend. These extensions provide traders with profit targets by identifying levels where the price is likely to encounter support or resistance.
How to Calculate Fibonacci Extensions§
Basic Concept§
Fibonacci Extensions are calculated using three points on a price chart: a significant high, a significant low, and a retracement level. The common extension levels are 123.6%, 138.2%, 150%, 161.8%, 200%, and 261.8%.
Formula§
The general formula for calculating Fibonacci Extensions is:
Example Calculation§
If the length of the prior trend is 100 points, the 161.8% Fibonacci Extension level would be:
Applications in Trading§
Identifying Profit Targets§
Traders use Fibonacci Extensions to set profit targets by identifying future price levels where the price might reverse or stall. For example, in an upward trend, the Fibonacci Extension levels could serve as potential resistance levels.
Combining with Other Indicators§
Fibonacci Extensions are often combined with other technical analysis tools like moving averages, trendlines, and candlestick patterns to confirm potential trade entries and exits.
Historical Context§
The concept of Fibonacci Extensions is derived from the Fibonacci sequence, named after the Italian mathematician Leonardo Fibonacci. His introduction of this sequence to Western European mathematics in the 13th century has since been applied to various fields, including financial markets.
Comparisons and Related Terms§
Fibonacci Retracements§
While Fibonacci Extensions project future price moves beyond the primary trend, Fibonacci retracements are used to identify potential reversal levels within an ongoing trend.
Elliott Wave Theory§
Both theories are often used together in technical analysis, with Fibonacci ratios aiding in identifying wave structures and projections within Elliott Wave Theory.
FAQs§
How Do Fibonacci Extensions Differ from Retracements?
What Markets Can Fibonacci Extensions Be Applied To?
Are Fibonacci Extensions Reliable?
References§
- Prechter, R. R., & Frost, A. J. (2005). Elliott Wave Principle: Key to Market Behavior. New Classics Library.
- Fibonacci, L. (1202). Liber Abaci. Pisa.
Summary§
Fibonacci Extensions are a versatile and widely-used technical analysis tool that extends beyond basic retracement levels to project future price levels and set profit targets. By understanding their calculation, applications, and historical context, traders can enhance their decision-making process in various markets.