Fibonacci Extensions Level for Positional Trading

    Posted by Admin on 28 May 2015 0

    What is Fibonacci Extension Level

    Fibonacci extensions are used by many traders to determine target levels where they wish to take profit. The Fibonacci Extensions tool is similar to the Fibonacci Retracements tool. It is also support and resistance indicator that is used to determine possible support and resistance levels.
    Most traders know that a Fibonacci retracement is a move in a security that "retraces" a portion of the previous swing. Usually a stock will retrace at one of 3 common Fibonacci levels - 38.2%, 50%, and 61.8%.
    But what happens when a stock retraces more than 100% of the prior swing ? In that situation, you can calculate a Fibonacci extension to forecast areas of support or resistance levels.

    Fibonacci extensions provide price targets that go beyond a 100% retracement of a prior move. The levels for fibonacci extensions are calculated by taking the standard fibonacci levels and adding them to 100%. Therefore, the standard fibonacci extension levels are as follows: 127.2%, 138.2%, 150%, 161.8%, 231.8%, 261.8%, 361.8% and 423.6%.

    Fibonacci extensions are a good way of finding out what price move is expected after a swing high or swing low is crossed.

    Important Fibonacci Extension Levels

    The key Fibonacci extension levels are 161.8%, 261.8% and 423.6%. Where the ratio of 161.8%, which is the "Golden Ratio" is found by dividing a number in the sequence by the number that precedes it. For example: 21 ÷ 13 = 1.6154, 34 ÷ 21 = 1.6190 and 55 ÷ 34 = 1.6176.

    How is it used ?

    Fibonacci extensions are used in a similar way as Fibonacci retracement but used in the opposite direction. The technical analyst identifies the trend, then waits for the market to turn against the trend and then waits for the market to start moving back in the direction of the dominant trend. The analyst then applies the extension ratios to the previous counter trend movement, or wave, starting from the previous low to the high in an uptrend or from high to low in a down word trend. Horizontal lines are then drawn at these levels and are used a possible resistance levels if the dominant trend is an uptrend, or as possible support levels if the dominant trend is a down trend.

    Calculating Fibonacci extensions work best when stocks or index are at new highs or new lows - where there aren't any obvious support or resistance levels on the chart. So, if you are bet on a long side in a stock and it begins to make new highs, and you want to take profits, you can calculate the fibonacci extension levels to get a general idea of where it may begin to fall. and same thing you can do on the short side.

    Next >>> How to use Fibonacci Retracement in Forex Trading

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