Fibonacci expansions are used the same way we use Fibonacci retracements only that these are mainly used to determine levels of take profit. From the notes we realize that Fibonacci retracements help us to identify the main swing direction and the probable reversal levels so as to identify good price entry levels.
The extensions help us to know how far a trend is likely to stretch after retracing the previous swing of the main trend. Once you know that, you will be able to determine when to exit trade and take profit. Let’s take a look a live chart and see how we can use extension/expansion levels to determine take profit levels.
First let’s first identify our entry point levels using Fibonacci retracement.
After clicking on the fibonacci retracement icon on the platform, you draw it on the chart by placing the cursor at point A and drag it down to point B as shown on our chart above.
Remember, you draw the Fibonacci retracement tool when you see a swing starting to retrace and then patiently wait for a confirmation signal for a bounce off the drawn levels. In our above example we have used the candlestick pattern confirmations
From our chart above, we had good signals for sell and buy entries. The sell was triggered by a spinning top on on a Fibonacci retracement level,, 38.2% in this case. The buy signal was showed by a bullish engulfing on the 50% retracement.
Now that we have taken the trades, all we need is to know the suitable levels where we can book ourselves profits before time expires on us. How? Use Fibonacci extensions or expansions. Extensions show us how far price is likely to move after retracing the previous swing. As usual the platform provides it all for you should have no worries about how to calculate the extension levels.
Let’s get started.
Move your cursor to the left upper side of your chart , if you don’t directly see the extension or expansion tool on your platform , click on the insert option and choose Fibonacci extension/expansion. Some platforms have only Fibonacci expansion, it’s ok. You can use any!
Let’s now see how the expansion level targets would look on chart;
Drawing the expansion tool, place your cursor at point A hold and drag it to B. Double click on the expansion line and then pull to point marked C. Do the same for the second position
The common take profit targets (Tp) levels on the extension tool are 61.8 and 100% extension levels. On our above chart Tp in blue is for the sell trade and Tp in red for the buy trade.
The extension of a trend can also depend on the strength of the trend and how deep it was retraced. There, we are determining how long price is likely to go after retracing point C
If the retracement is so deep, it may not be able to make a big extension. Looking at the volatility in the market and observing how price respects the identified extension levels you can tell the time to exit the trade. Fibonacci extensions also give the option for adding more levels in case price hangs in between the levels you can add a level to identify the levels of support and resistance.
How long you should hold an open position, is a personal thing for all traders. The decision is all yours. You know what your goals are as a trader, the kind of strategy you use to trade. All this starts from what you are? and What you want? If I am to answer, this...