As we covered Fibonacci Retracement, it’s time to introduce you to Fibonacci Extension.
As Fibonacci Retracement was the tool that measures how much some move could retrace, the Fibonacci extension is the tool that measures how far the price can go after a retracement.
Let’s go directly to one example. We are in an uptrend and the price went up.
After going up it retraced.
Once we saw that it is going down, we took the Fibonacci Retracement tool in order to see where the price may find support and give us a bullish sign.
After the area is established, and we got the sign we were looking for, we are using Fibonacci extension to see how far price can go up.
Once you plot it, you got some numbers on the right again.
What is their meaning?
Those are projected targets for the move up based on Fibonacci extension.
Everything below 1.0 is considered as the sign of weakness because the move didn’t outperform the previous one.
If the price reaches 0.618 or 0.786 it is still quite profitable for you but considering the whole trend in general, if the top is established there, even the price reached your target which is most important to you, the trend is showing weakness by not being able to outperform previous moves.
Quite the opposite, if the price extends above 1.0 and reaches some areas such as 1.618, it is a clear sign that the market is gaining strength and becoming even stronger.
The higher it goes, the stronger and more bullish market is.
For the majority traders, they would want to see price going as high as possible but for the stable trend growth, the move to 1.0 is the optimal one because in the same sign it shows the indication that the market is not weakening but also does not go up too much offering you chance to reenter once it pulls back.
These areas are like the areas from Fibonacci retracement.
They are there to serve you as potential hidden areas of interest.
As you can see, there are few of them but just one could potentially work.
By plotting them you do not have to try to trade every one of them because that will lead you to multiple losses.
You have to look at those that are giving you the sign.
Once it shows that it acts like support/resistance on the first test, you are opening your third eye and monitor closely what will happen on the next test.
Plotting Fibonacci extension is almost simple as the plotting Fibonacci retracement but requires from you one extra step to do.
There is a small difference between plotting an extension for uptrend and the one for a downtrend so we will explain both cases.
To plot a Fibonacci extension on an uptrend, you need to identify swing low and swing high of the main trend and swing low of the sub-trend.
It may sound hard for you but let us show you an example before going further.
We already explained you the definition of the swing low and swing high and how to identify them.
The low of the sub-trend may happen anywhere.
It doesn’t have to form on Fibonacci retracement level.
It may develop on other potential support or even random price.
It’s formed when we see a clear bullish sign that could be in the form of bullish engulfing or bullish pinbar.
Once they develop, we can mark it as low of the sub-trend.
After the low of the sub-trend is formed and price started going up, we got the third part we were waiting for so we can now plot the Fibonacci extension.
This is how it looks like once you plot it.
The process will be explained in the course about tradingview.com (charting software) where we will explain the entire process of plotting all chart tools we used in our course.
At the moment, the main point is to understand what you need to plot it and what is the meaning and usage of these Fibonacci levels.
How to use Fibonacci extension in a downtrend?
Identifying swing low and swing high has been explained in the past lessons so we assume that you know how to spot them.
In order to identify high of the sub-trend, you need some bearish sign and lower high after that bearish sign that will confirm the high.
What you want to see is either bearish sign that is confirmed by lower high or 2 or 3 times rejection by the resistance area.
You want to see the beginning of the move down so you can confirm it is going down and then you can try to look how low it can go.
All these areas are nothing more than hidden support areas.
The fact that only one may work is strong enough.
Trying to buy on every potential support area is a strategy that will end up like the majority of them, by blowing up your account.
Trade only those that give you a clear sign of their importance to the current price action.
Used to predict upcoming moves, Fibonacci extensions may serve us a lot especially when they are in confluence with another tools.
Here is an example of a Fibonacci extension where we can see the price reaching 1.0 extension almost perfectly.
Now, some people will say price went above that area which means it is invalidated.
The point of using this tool is to project your potential target for the move.
If you bought down there around low of the sub-trend and sold out at 1.0 Fibonacci extension, you made a great profit.
You don’t have to bother yourself for missing a little bit more because in trading profit is not made by trying to catch the tops or bottoms.
Yeah, it serves as resistance in this example but we don’t suggest you use them as resistances but instead for profit targets.
If you try to open short trade on one of these levels, you are going against the main rule of trading, against the trend.
Trading against the trend is highly risky and will lead you to a lot of troubles.
Trade with the trend, not against it.
The main event in 2018 for the crypto market was a Bitcoin break of $6000 support level.
Let us show you how it perfectly played out following Fibonacci extension.
Maybe it was a coincidence, maybe not.
The point of this is that if you were using the Fibonacci extension, you would get a significant price level to look at.
As we said above for an extension in an uptrend, same worth for an extension for a downtrend.
It is used as a profit target, not for an entry opportunity because for both cases, it is a trade against the trend.
Milos is an independent trader, with a background in journalism and publishing. Nomadic by nature, he’s lived in four different countries this decade. He’s fascinated by Blockchain technologies’ potential to reshape all aspects of our lives. Milos got into Bitcoin while completing his degree and hasn’t looked back since, writing about anything crypto-related. He is the co-founder of the Cryptoaims and he has a strong passion to educate people about this revolutionary technology.