Fibonacci Extension: Projecting Price Targets In Forex – Fibonacci expansions are a lesser known Fib analysis technique. The more common fib application used by traders is Fibonacci retracements. However, Fib extensions offer similar advantages and can help a trader find potentially important areas of support and resistance that are not immediately visible on the price chart. Therefore, this article will be devoted to explaining everything you need to know about Fib extensions and their use in the market.
Fibonacci expansions are also often called Fibonacci projections. These two terms can be used interchangeably and therefore, when we refer to a Fib expansion or a Fib projection, we are talking about the same thing. So what exactly are Fibonacci expansions or Fibonacci predictions and how can they be applied in market analysis?
Fibonacci Extension: Projecting Price Targets In Forex
Fibonacci expansions can be viewed as price levels that represent hidden support and resistance on the price chart. They can be used in myriad ways, but their best use is to find potential entry and profit making zones.
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These levels are considered confidential because unlike traditional horizontal price levels taken from various volatility points or other obvious levels on the price chart, Fibonacci expansions are obtained using a very specific technique that is not particularly well known to many outside of Fibonacci-based trading circles.
Basically, Fibonacci expansions allow us to predict how far a potential price move could go. This price move is typically considered an impulsive price move in the context of the Elliott wave. That is, it will typically follow a correction phase thereby forming a new trend leg in the direction of the larger trend.
In this way, they are very different compared to Fibonacci retracements. Unlike Fibonacci retracements, which measure an internal retracement against a larger trend foot, a Fibonacci expansion or projection measures an external price foot.
Let’s take a look at what Fibonacci expansion levels look like on the price chart and see an example.
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In the price chart above, you can see four horizontal price lines representing the primary Fibonacci expansion levels. This includes the upper green line representing the 0.618 fib level, the red line just below the 1.00 fib level, the blue line representing the 1.618 fib level, and finally the bottom horizontal line representing the 2.618 fib level. In this example, notice how price interacts at the various fib broadening levels plotted.
Now, although Fibonacci expansions can be used as a standalone analysis technique, once you find that there is a set of Fibonacci levels based on different measures of price fluctuation, the area in which such a set occurs is considered very important. For example, if you see a 100% Fibonacci expansion on the daily chart coinciding with a 61.8% Fibonacci retracement level on the weekly chart, we can be more confident that this particular level will act as a major support or resistance. level as the price approaches it.
Fibonacci projection levels are calculated using specific Fibonacci ratios. And Fibonacci ratios are derived from the Fibonacci sequence of numbers. The Fibonacci sequence of numbers is a sequence of numbers that starts with zero and one and continues by adding the next number with its old number. For example, here is the set of starting numbers in the Fibonacci sequence.
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987… And so on forever.
Fibonacci Expansion Levels
The Fibonacci sequence of numbers has many special properties seen in the natural world and in the markets. Let us illustrate these features with some examples.
When you divide a number in the series by the last number in the series, the resulting number approaches 0.618, or 61.8%.
If we look at another example, when we divide a number in the sequence by the old number in the sequence, the result comes close to 1.618, or 161.8%.
Below you can see the Fib 1.618 projection ratio in action. Notice how the price tests the 1.618 level before climbing higher. This level acted as a strong support for the downtrend.
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Additionally, when you divide a number in the series by the second oldest number in the series, the resulting number approaches 2,618, or 261.8%.
The Fibonacci ratios shown in the examples above represent key Fibonacci projection levels often seen in financial markets. In addition to 0.618, 1.618 and 2.618 Fibonacci projection levels, 1.00 and 1.27 Fibonacci projection levels are also considered very important in the context of price movements in financial markets.
Now let’s discuss how to plot Fib price projections on your price chart. Depending on your graphics software, the Fibonacci projection tool may go by several different names. The tool is often referred to as the Fibonacci projection tool, the Fibonacci extension tool, or in some cases the Fibonacci extension tool.
While Fibonacci extensions are actually a completely different type of work, some platforms actually use this name and it’s actually not the correct naming convention. In any case, you’ll have to look at your graphics platform for details on this.
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The Fibonacci projection tool requires three swing points to be selected. When you select the three swing points, the Fibonacci projection levels are automatically plotted on your price chart. So, how do you go about choosing certain swing points?
In the case of an upward price projection, you start by choosing the beginning of the price action. Then you pick the higher of that price action. Finally, you choose the swing low that follows this upside price leg.
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Referring to the same price chart we reviewed earlier, you can see the significant swing referred to as point 1. This is the first significant swing to be selected. As prices move down within this price leg, it ends at point 2, which represents the key swing low to pick. Finally, we see a correction that traces the price action from point 1 to point 2. The endpoint of this correction is shown as point 3. And this secondary high swing will be the last point chosen to plot the Fibonacci projection levels.
Using Fibonacci Levels To Scalp Forex
As we implied earlier, these Fibonacci projection levels get excellent entry and profit scores during an open trade. Some traders prefer to use one or two very specific Fib projection levels to exit the trade completely when these levels are reached. Other traders prefer to scale their positions as price approaches each key Fib projection level.
For example, a trader using the scale-up technique may exit one-third of his position at the 100% Fib projection level, exit one-third of his position at the 127% Fib projection level, and then exit the final third. Their position at the 161% Fib projection level.
Now let’s create a trading strategy that incorporates the Fibonacci expansion trading technique. The strategy we are going to describe will benefit from just two technical studies. The first will obviously be the Fib expansion tool and the second will be the Price Change Rate indicator, also called ROC.
The Rate of Change indicator is a momentum indicator that can help identify periods when momentum in price action starts to favor one side of the market against the other. The default look-back period for the rate-of-change indicator is nine periods, which we will use.
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Let’s look at an example of the Fibonacci expansion strategy outlined in the previous section. Below you will find the price chart of the Euro Yen cross currency pair shown on the weekly timeframe.
As we can see from the far left of the chart, the price action has made an intermediate bullish move. This led to two pusher price legs to the downside, which was corrected by an upside price move. We can use the Fibonacci expansion tool to draw the 127% expansion level as the price moves down in the second phase.
To plot this level, we would choose the middle high swing at the far left of the price chart as the first point, the low swing ending this first leg down as the second point, and the end point of our upward corrective move. third and final point.
After selecting these three points, the Fib extension tool will automatically draw our desired 127% level. This level is shown on the price chart as the light green line near the bottom of the price action. Keep in mind that each charting platform will work a little differently and you may need to deselect all other projection levels it can plot or simply select the 127% level we want.
All About Fibonacci Extensions: What They Are, How To Use Them
In any case, once the 127% projection level is drawn, we will wait for the price to touch the level or come relatively close.
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