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Technical Analysis: Utilizing Fibonacci Extensions

The
Fibonacci extension tool is used mainly for finding possible profit targets.
These levels are based on the Fibonacci ratios and the two main extension
levels are the 1.272 and the 1.618. Generally, when the price reaches those
targets it pullbacks following the classic ebb and flow of the market. The
corresponding technical tool is called “fibonacci expansion” on the popular
MetaTrader platform or “trend-based fib extension” on Tradingview.

This
tool is better used in clear uptrends or downtrends and not in a ranging
market. To use it, you just need to find an impulse leg that will be taken as
the base for the extension and then click on the swing points of the leg to
project the levels. So, in an uptrend you click on the swing low, then drag to
the swing high and finally back to the swing low. In a downtrend you click on
the swing high, then drag to the swing low and finally back to the swing high.

Needless
to say that Fibonacci extensions are not fool proof as any other technical tool
but they can be used as a guide for profit targets, maybe for some position
squaring while you hold a position for longer for fundamental reasons. You
shouldn’t exit a trade unless the fundamental reasons change or you lose
conviction in a trade, but for a short-term trader the price pullbacks can be
annoying as you may get stopped out and lose the gains that you may have got if
you closed a trade earlier. At the end of the day, you are responsible for your
own decisions and trading style.

This
article was written by Giuseppe Dellamotta.

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