Fibonacci Extension

Fibonacci Extension is a technical analysis tool used by traders to identify potential price targets in the financial markets. It is based on the Fibonacci sequence, a mathematical formula that can be applied to price charts to predict future levels of support and resistance.

How Fibonacci Extension Works

To use Fibonacci Extension, a trader must first identify a significant price move in a financial instrument. This move is then divided into three key levels: the initial price move (100%), and the two subsequent retracement levels (usually 61.8% and 38.2%). The Fibonacci Extension levels are then plotted on the price chart to identify potential areas of future price movement.

Example of Fibonacci Extension

For example, if a stock price moves from $50 to $100 (a 100% increase) and then retraces to $75 (a 50% retracement), a trader could use Fibonacci Extension to predict potential future price targets. By applying Fibonacci Extension levels to the price chart, the trader may identify levels such as $125 (a 25% extension) or $150 (a 50% extension) as potential price targets.

Limitations of Fibonacci Extension

While Fibonacci Extension can be a valuable tool for traders, it is not without its limitations. Like any technical analysis tool, Fibonacci Extension is not always accurate and should be used in conjunction with other indicators and analysis techniques to make informed trading decisions.