What is Fibonacci extension?

17 Jun 2022

Hey everyone! 👋

Last time we explained some of the basics to know when it comes to understanding the Fibonacci retracement tool. If you haven’t read that post, be sure to check it out here:

In this post, we are going to look at the Fibonacci extension along with a few exhibits that may help you solidify your understanding of this unique trading tool.

Please remember this is an educational post to help everyone better understand investing and trading tools. In no way are we trying to promote a particular style of trading!

Table of Contents:
1. What are Fibonacci extension levels?
2. What is the significance of extension levels?
3. How to find extension levels?
4. Difference between the Fibonacci retracement and Fibonacci extension

Without further ado, let’s jump in!

What are Fibonacci extension levels?

• A Fibonacci extension is a tool that can be used to find price targets or estimate how far a price may move after the retracement/pullback is over.
  
• Extension levels are also possible areas of interest where the price may stall or reverse.
  
• It can be used to find projected areas of support or resistance when the price is moving into an area where other methods of finding support or resistance are not applicable or evident.
  
• Fibonacci extension levels can be calculated to give the trader ideas on profit targets.

Significance of Fibonacci extension levels
Different traders use this tool differently but the most common usage is as follows:

• Fibonacci extensions can be used for any timeframe and in any market- stocks, commodities, cryptocurrencies, etc.
  
• Fibonacci extension levels indicate a price area that will be significant for the stock after the pullback/correction is over.
  
• Extension levels can be drawn on different price waves over time. When levels from these different waves converge at one price, that could be a very important area.

For example, A stock may be in an uptrend. After a move up, it retraces to the 61.8% level. Then, it starts to go up again. In this case, the extension tool can be used to find the optimal targets after the price moves above the swing high level (100% level).

How to find Fibonacci extension levels?
In order to find the Fibonacci extension levels, you have to find the recent significant swing high and swing low and then plot the Fibonacci extension accordingly.

For uptrend: First, select the swing low and then the swing high. Then go to the Fibonacci settings and select reverse.



For downtrend: First, select the swing high and then the swing low. Then go to the Fibonacci settings and select reverse.



Exhibit: Fibonacci extension in an uptrend



Exhibit: Fibonacci extension in a downtrend



Difference Between Fibonacci Retracements and Fibonacci Extensions

• Fibonacci retracements provide levels for a pullback whereas Fibonacci extensions provide levels in the direction of the existing trend.
  
• For instance, a stock goes from 50 to 100 and then falls back to 75. The move from 100 to 75 is a retracement. If the price starts rallying again and goes to 150, that is an extension because the price moved past the previous swing high which is 100 in this case.

Conclusion:
Adding Fibonacci analysis with other common methods of technical analysis can be useful for adding confluence to a trade.

Thanks for reading! Hope this was helpful!

See you all next week. 🙂
– Team TradingView

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