How to Use the Fibonacci Extensions Tool
The Fibonacci Extensions tool is a multi-timeframe trading instrument that can be applied to any financial market. Its unique value lies in its ability to indicate precise take-profit levels when an asset breaks an all-time high (ATH) and enters price discovery.
What Can the Fibonacci Extensions Show?
While the Fibonacci Retracement identifies potential retracement levels, Fibonacci Extensions reveal how far the price may rise following a retracement. This makes them particularly effective for identifying market tops when an asset enters price discovery. However, the tool is also applicable for spotting market bottoms.
Fibonacci Extensions calculate the impulse wave in the direction of the trend. The tool can be customized to display any desired levels, but the most commonly used ones are shown in the table below.
Table: Key Fibonacci levels
|
Key Fibonacci Levels |
|
|
0.2360 |
1.0000 |
|
0.3820 |
1.6180 |
|
0.5000 |
2.6180 |
|
0.6180 |
3.6180 |
|
0.7860 |
4.2360 |
How to Use the Fibonacci Extensions Tool
The Fibonacci Extensions tool consists of a basic trendline, an extension line, and Fibonacci retracement levels. To draw the Fibonacci Extensions effectively, you need to identify three key points:
(i) The start of the impulse wave (trendline)
(ii) The end of the impulse wave and the beginning of the retracement (extension line)
(iii) The end of the retracement (extension line)
(i) Start of the Impulse Wave
- This price marks the beginning of the trendline.
- It represents the start of a new price trend and can be a swing high (top) or swing low (bottom).
- A strong price movement typically follows this point.
(ii) End of the Impulse Wave
- This price marks the end of the trendline.
- It indicates the start of a reversal and is followed by a price retracement.
(iii) End of the Retracement
- This price marks the end of the extension line.
- It signifies the completion of the retracement and the resumption of the original trend direction.
- After selecting the tool, click the first point at the start of the impulse wave (Point 1), the second point at the end of the impulse wave (Point 2), and the third point at the end of the retracement (Point 3).
Examples When Trading with Fibonacci Extensions — Taking Profit
One of the most challenging tasks in financial trading is deciding where to take profits. This becomes even more complex when the price breaks an all-time high (ATH) and enters price-discovery territory. In such cases, Fibonacci Extensions can help identify target levels where the price is likely to reverse.
Alternatively, you can choose to ride the trend using a trailing stop.
- Using Fibonacci Extensions on Nasdaq (US100)
In the following chart, the tool is applied to Nasdaq during the bull market from 2019 to 2021.
Chart: Applying Fibonacci Extensions to the daily Nasdaq (US100)
- Using the Fibonacci Extensions on Ethereum
In the following chart, the tool is applied to ETHUSD during the 2020–2021 bull run. After reaching a new all-time high, Ethereum’s price entered price-discovery territory.
Chart: The Fibonacci Extensions tool and Ethereum
As shown in the ETHUSD chart above, the 4.236 target level was nearly an exact match.
Notes:
- When an asset enters price-discovery territory, the most important extension levels are 1.618, 2.618, 3.618, and 4.236.
- The Ethereum chart is from the book Bitcoin & Ethereum Trader by George Protonotarios. ► Find the book on Amazon: https://www.amazon.com/dp/B09DQ54897
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