Fibonacci extension is a tool that can be used to find price targets after the retracement is over. It is exactly the opposite of Fibonacci retracement.
Table of Contents:
- What are Fibonacci Extension levels?
- Significance of extension levels
- Finding Fibonacci extension levels
- How to use the extension levels?
- Difference between Fibonacci retracement and extension.
What are Fibonacci Extension levels?
• As mentioned above, extension is a tool that can be used to find price targets or estimate how far a price may move after the retracement/pullback is over.
• Extension levels are also possible areas of interest where the price may stall or reverse.
• It can be used to find projected areas of support or resistance when the price is moving into an area where other methods of finding support or resistance are not applicable or evident.
• If in a stock, a new high/low occurs, the trader can use the extension levels to get an idea of where the price can go.
• Extension levels can be calculated to give the trader ideas on profit target placement.
Significance of Fibonacci Extension levels:
• Fibonacci extensions can be used for any timeframe and in any market- stocks, commodities , cryptocurrencies, etc.
• Extension levels indicate a price area that will be significant for the stock after the pullback/correction is over.
• Extension levels can be drawn on different price waves over time. When levels from these different waves converge at one price, that could be a very important area.
Finding Fibonacci Extension levels
In order to find the extension levels, you have to find the recent significant Swing High and Swing Low.
• For uptrends, click on the Swing Low and then on the Swing High. Then go to the Fibonacci setting and click on reverse. Or if your software directly has the extension tool then it’s even easier.
• For downtrends, click on the Swing High and then on the Swing Low. Then go to the Fibonacci setting and click on reverse.
Exhibit: Fibonacci extension in an uptrend
Exhibit: Fibonacci extension in a downtrend
Difference Between Fibonacci retracement and Fibonacci extension
• Fibonacci retracement provide levels for a pullback whereas extension provide levels to move in the direction of the existing trend.
• For instance, a stock goes from 50 to 100, and then back to 75. The move from 100 to 75 is a retracement. If the price starts rallying again and goes to 150, that is an extension because the price moved past the previous swing high which is 100 in this case.
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