The Fibonacci extensions

The Fibonacci extensions, like Fibonacci retracements, are used to establish support and resistance levels, with the difference that the Fibonacci extensions are generally used as potential targets for profit taking, while retracements are often used as possible points of entry.

Fibonacci extensions are widely included in modern trading platforms like Metatrader 4 and are used in much the same way as the retracements are used, as we saw in the article on Fibonacci retracements. Even some trading platforms allow to draw extensions and retracements in the same chart.

The three points to calculate Fibonacci extensions

To draw or calculate Fibonacci extensions we need 3 points: maximum, minimum and the so called point C. Point C is the minimum or maximum level reached by the pullback that occurs after a trend movement. For example, during a bullish trend the price will reverse producing a bearish pullback and point C is the minimum reached by this pullback before the price continue the uptrend. The opposite occurs for a downtrend.

In other words, the point C marks the end of the pullback that occurs after the price movement for which the Fibonacci extensions are calculated. What if there is no pullback? If there is no pullback it means that the trend movement continues and therefore we can not calculate any Fibonacci level or extensions or retracements, because in this case these levels have no sense.

 Very often point C match any Fibonacci retracement level, especially the 50% and 38.2 retracemets. For example, we want to draw Fibonacci extensions for a movement that was from 1.5000 (minimum) to 1.6000 (maximum); from 1.6000 the price made a pullback that reached a low at 1.5500, this minimum at 1.5500 would be the point C which coincide with the Fibonacci retracement of 50%.

Example of Fibonacci extensions

In the previous image there is a D1 price chart for the GBP/USD in which we can see a clear downward trend. For this chart we use the Fibonacci tools of Metatrader 4 to draw Fibonacci extensions and retracements such as 38.2%, 50%, 61.8%, 100%, 161.8% and other.  

These levels became targets after the end of the bullish pullback and resumption of the dominant downtrend. In this example you can also see how the price found support / resistance at Fibonacci extensions.