Fibonacci Extension (Fibonacci Extension) is a technical analysis tool built on the sequence of Fibonacci numbers. This technical analysis tool is available on most review platforms from reputable forex brokers. Fibonacci extensions are mostly used by traders to find the most optimal profit points. Due to the special usage of this technical indicator, in this article we go to kiemtien.com to learn about it!
Extended Fibonacci Levels
The default Fibonacci Extension levels are: 0, 0.236, 0.382, 0.5, 0.618, 0.764, 1, 1.236, 1.618, 2.618, 3.618 and 4.618. Levels used as potential take profit are 0.618 to 1.618. Levels below 0.618 have a very low profit level. A bad Risk Reward ratio will cause you to lose in the long run. Levels above 1.618 are often difficult to reach, only strong and very long trends can make profits at these levels.
See also: What is the Risk Reward Index? The easiest way to calculate the Risk Reward
How to draw the Fibonacci extension based on the trend
To draw the Fibonacci Extension, it is necessary to identify 3 points:
In a downtrend, we need 2 tops and 1 bottom. In an uptrend, we need 2 bottoms and 1 top. How to draw: Drag the Fibonacci Extension gauge from point 1 to point 2 and finally end at point 3 as shown above.
See also: Find out what is fibonacci? trade fibonacci effectively
How to use the Fibonacci extension to make a profit
Similar to Fibonacci Retracement, there are many Fibonacci extensions and we need to know which level of Fibonacci extension will be an effective place to take profits and optimize profits. We agree that using the Fibonacci tool independently is not the most effective.
We will give you three ways to choose the strongest Fibonacci Extension level to make profits:
- Method 1: Combine Fibonacci Extension with Support and Resistance.
- Method 2: Match the Fibonacci extension with the price channel.
- path 3: Combine the Fibonacci extension with the Japanese candlestick.
Method 1: Match with support or resistance
Once you've identified three points to draw the Fibonacci Extension, you can see potential profit levels. Watch for resistance or support near the current price and draw them. Fibonacci extension levels located right in the resistance or support area will be the ideal profit point.
More specifically, there are two levels of profit taking according to the Fibonacci extension that we recommend you pay attention to:
- The extended Fibonacci level is very close to the resistance or support area of the bottom or top 2.
- The Fibonacci level extends into the next support or resistance area when the price breaks the bottom or top 2.
View more: What is support and resistance? How to identify potential support and resistance zones
We get into a practical example of how to define profit with the Fibonacci Extension.
In this example, we see that reasonable profit levels are:
- 0.618 Fibonacci Extension at Lower Support 2.
- The 1618 Fibonacci extension is in strong support of the previous bottom (above the figure).
If you choose to take profits the first way, you will likely regret it when the price reaches 1.618. However, if you choose to take profits the second way, the price may reverse before reaching your profit point. The advice here is, you can choose between two ways, or you can take half the volume profit when the price hits, take a profit way one, and increase half the volume to make a profit way two.
View more: Know what is forex? Basic knowledge of forex trading
Method 2: Match with the pricing channel
If you are confused about the pricing channel, you can review the full pricing channel here. We reiterate some content for this article:
- The price channel consists of two parallel trend lines.
- The price channel covers the best part of the price in a trend. Simply put, the price moves almost within the price channel.
- In a market with clear trends, the channel can be used to enter orders and earn profits.
Theoretically, you can SELL when the price touches the uptrend line, take profits on the downtrend line. And vice versa, BUY when the price touches the downtrend line, take profits on the uptrend line. However, in practice, we recommend:
- In an uptrend with an ascending price channel, the uptrend line is only used to receive take profit orders to buy, not to enter sell orders.
- In a downtrend with a descending price channel, the downtrend line is only used to take profit on a sell order, not to enter a buy order.
The extended Fibonacci level in the resistance or support area of the price channel will be a more reasonable profit point than other levels.
In the chart above, you can take profit one way at the Fibonacci Extension 0.764 level, or take profit the second way at the Fibonacci Extension 1.0 level.
View more: What is Trendline? Instructions on how to draw the most accurate trendline
Method 3: Match the Japanese candlestick pattern
You will use a reversal candlestick pattern along with a Fibonacci extension to find the sweet spot of profit. When the buying or selling power of the trend is weakened according to the price action, shown by the appearance of the Japanese candlestick pattern, it is the basis for determining when the price ends the main trend and reverses.
After the market drops extremely hard with a very long bearish candle, you use the Fibonacci extension to find an entry point. The price dropped to the Fibonacci extension of 0.764 and then turned around, ending the session with a Doji tree that is very unfavorable for your sell order. After this Doji appears, you should close your trade because the buyers showed very strong pressure. If you want to optimize a little more profit, you can enter a shorter deadline to close the order, when the price drops even more before officially reversing.
Conclusion
Through this article, we impart to you the knowledge about the Fibonacci Extension. How to draw, how to use this tool to find the most effective and optimal profit point. Hope you can master this tool in your trading orders. And don't miss the free forex signals we've compiled from trusted sources. Also, you can learn more about Elliott wave theory in our next article.
View more: What is an Elliott wave? Learn about the 5 levels of the Elliott wave