Introduction to Fibonacci Trading
Fibonacci trading is a technique that traders use to predict potential support and resistance levels in the market. It’s based on the Fibonacci sequence, a series of numbers where each number is the sum of the two preceding ones, starting from 0 and 1. The sequence goes as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, and so on.
In the world of trading, Fibonacci ratios, derived from this sequence, are used to identify potential reversal points in the market. The most common Fibonacci ratios used in trading are 23.6%, 38.2%, 50%, 61.8%, and 100%.
Understanding Fibonacci Extensions
Fibonacci extensions are a tool that traders use to determine potential areas where the price of an asset may move to after a retracement or pullback. These extensions are based on the same Fibonacci sequence, but they extend beyond the 100% level. The most commonly used Fibonacci extension levels in trading are 138.2% and 161.8%.
How to Use Fibonacci Extensions
The first step in using Fibonacci extensions is to identify a significant price move, either up or down. This move is known as the ‘base move’. Once you’ve identified the base move, you can apply the Fibonacci extension tool to it.
The 100% level of the Fibonacci extension represents the end of the base move. The 138.2% and 161.8% levels represent potential targets for the price after a retracement or pullback.
Traders often use these levels as potential take-profit points or to manage their stop-loss levels.
Fibonacci Trading with Extensions
Using Fibonacci extensions in trading involves combining the concepts of Fibonacci retracements and extensions. The idea is to identify potential reversal points in the market using Fibonacci retracements, and then use Fibonacci extensions to predict where the price may go after reversing.
Steps to Fibonacci Trading with Extensions
Step 1: Identify a Significant Price Move
The first step in Fibonacci trading with extensions is to identify a significant price move. This could be a strong upward or downward trend.
Step 2: Apply the Fibonacci Retracement Levels
Once you’ve identified a significant price move, apply the Fibonacci retracement levels to it. These levels will help you identify potential reversal points in the market.
Step 3: Apply the Fibonacci Extension Levels
After identifying a potential reversal point using the Fibonacci retracement levels, you can then apply the Fibonacci extension levels. These levels will help you predict where the price may go after reversing.
Step 4: Enter the Trade
If the price reverses at one of the Fibonacci retracement levels and then moves towards one of the Fibonacci extension levels, you could consider entering a trade.
Step 5: Manage the Trade
Finally, you can use the Fibonacci extension levels to manage your trade. These levels can act as potential take-profit points or stop-loss levels.
Conclusion
Fibonacci trading with extensions is a powerful technique that can help traders predict potential reversal points in the market and where the price may go after reversing. However, like all trading strategies, it’s not foolproof and should be used in conjunction with other technical analysis tools and indicators.
