Applying price extensions and retracements

We have learned Fibonacci retracement in detail, but how can you apply extensions and retracements? It can be quite complicated for someone if he or she doesn’t know, at least the basics of price extensions and retracements. Therefore, we have decided to help you understand the basics of price extension and retracements. Let’s get started.

Understanding Fibonacci extensions

Price extensions or Fibonacci extensions, you can call it either way. From now on, let’s continue with the term Fibonacci extensions. So, what does the Fibonacci extension mean? Even if you have not heard of them before, if you are planning to trade the financial markets, you must learn them in detail.  

These extensions are a tool traders use to find the profit targets or to estimate the level the price travels after a pullback or retracement. These extension areas are prone to price reversal, at times. These extensions are marked on the chart by analyzing the possible price levels. However, these levels will be examined by considering Fibonacci ratios and the indicator’s price move size.

Fibonacci extensions formula

Actually, you can’t find an official formula for the Fibonacci extension. However, a trader will consider three points when applying the indicator to the chart. After selecting the three points, the links are sketched at percentages as per the move. The chosen first point is the starting, second is the end, and the third point is considered the end of against retracement move. So, by using the extensions, the trader will identify the price’s direction.

Fibonacci extensions suggest the following

So basically, Fibonacci extensions can be used to find the price targets. Or when the support and resistance areas can’t be found through other methods, you can Fibonacci extensions to determine the areas of support and resistance during the price movement.

If the price travels through a particular extension level, the movement will be continued to the next.

With that, you might have understood that these extensions indicate the possible interest in certain areas. Even though the price will not reverse or stop at the exact level, you might have to consider the area as necessary. For example, 1.618 level would have been passed by the price or pulled up to move aware of it prior to direction changes.

Another example is if a trader is holding on to a long period of the stock. If a new high happens to occur, the Fibonacci extensions can be utilized to get an idea of the stock direction. The same applies if the stock is short term.

So, if you are brainstorming ideas to place profit targets, Fibonacci extensions are the ideal choice. Once this is decided, the trader can cover the position at the level, if preferred. Anyway, you can use these extensions in any market and in any timeframe. The clusters in these levels emphasize the price area that will be prominent for the stock. Also, it is beneficial in decision making.

You must know that these extension levels are to be drawn on varying price waves with time. An important area will be when changing waves from multiple levels cover at one price.

That said, let’s move to the next section of this chapter so that we can cover everything related to price extensions and retracements.

Different between Fibonacci retracements and extensions

Even though Fibonacci extensions help a trader to understand the price that follows retracement, the depth of retracement can be identified through Fibonacci retracement levels, only. In simple terms, pullbacks in a trend are measured by a Fibonacci retracement, and Fibonacci extensions measure impulse waves.  

Fibonacci Extensions Limitations

By now, you might be assuming that Fibonacci extensions are a significant determinant when deciding to buy or sell off stock or currencies. But they are not the prime determinant to decide it, let this sink in. As we have explained this to you, it is a must to make sure to use some other patterns or indicators along with extensions when deciding one or more price targets.

It is advisable to use price action and candlestick patterns when deciding the point when stock will reverse. Also, these indicators and patterns are informative.

You must also remember that we can’t guarantee that the price will reverse or reach a determined extension level. Plus, there is no surety about the level before a trade takes place, so you must be considerate of this, too. Sometimes, the price might travel through different levels pretty quickly, and some other times, they might not reach any of the levels.

Wrapping up

We have covered all the essential aspects of price extensions and retracements related to Fibonacci. As a beginner, every new concept will sound unfamiliar, but once you learn and execute those, things will fall into places. You might treat it like your favorite concept.