How to Draw Fibonacci Extensions: Fibonacci Extension Levels, Targets and Trading Strategy
Today, we're diving deep into the world of Fibonacci extensions, a powerful tool for identifying price targets in your trading strategy. Whether you're into forex, day trading, or just curious about advanced technical analysis, this guide is for you. Let's get started!
Understanding Fibonacci Extensions
When it comes to Fibonacci extensions, our primary focus is on identifying target levels. Remember, while Fibonacci retracements help us find entry points, Fibonacci extensions are all about pinpointing where to take profits.
Identifying Swing Highs and Lows
To use Fibonacci extensions effectively, you must first identify swing highs and swing lows. Let's look at an example chart:
Swing Low: This is where the price bottoms out before a significant upward move.
Swing High: This is the peak point where the price starts to pull back.
By recognizing these points, we can draw accurate extensions and predict potential price targets.
Fibonacci Swing High Swing Low
Key Fibonacci Levels
In our example, we see multiple price reversals at critical Fibonacci levels:
0.786 Level: Look out for potential price reversals here.
1.0 Level: This is a crucial level because it’s where the next swing move is equal to the previous one.
1.618 Level: This number, derived from the Fibonacci sequence, is a common reversal point.
Fibonacci Extension Levels: 0.786, 1.0, and 1.618
Drawing Fibonacci Extensions Correctly
Here's how to draw Fibonacci extensions in TradingView:
Open the Fibonacci Extension Tool: Head to the 'Gann and Fibonacci Tools' section.
Choose Trend-Based FIB Extension: Select this tool for accurate measurement.
Identify the Impulsive Move: Start from the swing low, drag to the swing high, and then down to the next swing low.
For precise extensions, you can use either the candlestick wicks or the real bodies of the candles.
Understanding Fibonacci Numbers
The numbers in Fibonacci extensions represent percentages. For instance:
0.786: Indicates the price has moved 78.6% towards the measured move objective.
1.0: Signifies the price has reached the full 100% measured move objective.
1.618: Means the price has surpassed the objective by 61.8%, a common level for taking profits.
Practical Application in Trading
Fibonacci extensions are not just theoretical; they provide practical price targets for traders. When the price reaches the 1.0 level, many traders take profits. If the price extends to the 1.618 level, it's another popular profit-taking point. These levels help you manage trades and optimize your exit strategy.
Conclusion
Mastering Fibonacci extensions can significantly enhance your trading strategy by providing precise price targets. Remember to practice identifying swing highs and lows, and use the Fibonacci extension tool to map out your trading plan. To learn more about trading swing highs and swing lows, check out this article next!
