Lesson #25 Identifying the Forex Fibonacci Extension Levels

Another use of Fibonacci application concerns that of targets. An example of an uptrend would be a good start.

When there is a clear uptrend, what you need to do is to take profits on long trades at Fibonacci Price Extension Level. You will be able to identify Fibonacci Extension levels through 3 simple mouse clicks.

First, select a significantly identifiable Swing Low. Next, you need to select and click on a Swing High. Third, drag down your curser and select retracement Swing Low.

These simple actions will show Price Extension Levels indication the ratio of each and the matched price levels.

Using this 1 hour chart of USD/CHF, you can plot the Fibonacci Extension Levels by selecting the Swing Low on 08/14/05 at 1.2447.

Then, you have to drag the mouse over the Swing High on 08/15/05 at 1.2593. Drag down and select a retracement Swing Low on 08/15/05 at 1.2541.

Essentially, you have created Fibonacci Extension Levels in the following order: 1.2597 (0.382), 1.2631 (0.618), 1.2687 (1.000), 1.2743 (1.382), 1.2760 (1.500), and 1.2777 (1.618).

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You now have to look at the actual event after a Retracement Swing Low happened.

• There is a rally of the market at 0.500 levels.

• It goes down to the retracement Swing Low.

• A rally happened and went back to 0.500 level.

• Then a slight downward movement occurred.

• It rallied again to 0.618 level.

• It went down again at 0.382 level which acted as support.

• Another rally happened going up to 1.382 level.

• A slight consolidation occurred.

• Finally, another rally occurred all the way to 1.500 level.

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Based on the examples, you can clearly see that the market oftentimes resisted temporarily at the Fibonacci Extension levels. This often happens but take note that it is not always the case.

The example also showed that there are clear problems you need to deal with at the retracement levels.

First, you will never know which level will be able to provide resistance. Covering any long trade would be good at the 0.500 level because the market retraced at its initial level. On the other hand, if you will not be able to return to the trade, you will lose lots of profit taking opportunities.

Another problematic area in creating Fibonacci Extension levels is where to start the Swing Low. Based on the examples, the best option is to start from the Last Swing Low. Another choice is to select the lowest Swing Low based on the previous 30 bars.

In the final analysis, you cannot really have a single correct method to do it. It will generally become a simple guessing game.

On a downtrend, setting up the Fibonacci Extension Levels can also be very useful. During a market downward movement, the Fibonacci price extension levels offer great opportunities for profit taking on short trades. That is because the market almost always finds temporary support at these levels.

Based on the 1 hour chart of EUR/USD, you should plot the Fibonacci Extension levels at the Swing High on 07/15/05 at 1.21377. Bring the cursor to the Swing Low on 08/15/05 at 1.2021. Create a retracement High of 1.2085.

Basically, you have created a Fibonacci Extension Level with the following data: 1.2041 (0.382), 1.2027 (0.500), 1.2013 (0.618), 1.1969 (1.000), 1.1925 (1.382), 1.1911 (1.500), and 1.1897 (1.618).

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You have to see what happened after the retracement Swing Low emerged:

• A downward trend appeared at the market to almost 0.382 level. This acted as support levels for now.

• There is a sideways trading in the market between the retracement Swing High and 0.382 level.

• Lastly, the market broke out from 0.382 and stopped at 0.500 level.

• After this happened, the market broke out again at the 0.500 level and went down all the way to 1.000 level.

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Fibonacci levels will not be able to bring lots of cash to you if used alone. On the other hand, learning how to set up Fibonacci levels will enable you to have an effective trading method. This will include other trading techniques and analysis.

The most important thing in trading is to use several indicators and apply it to your trading practices. Be careful though not to use too much indicators.

You can succeed in trading if you know how to integrate several market indicators. The Fibonacci levels will be very useful for you but never enter a trade based on this alone.