Fibo Expansion Levels - Analysis of Fibonacci Extension Levels in Charts
We've looked at Fib retracements in the previous lesson, Fib Retracement is drawn between 2 points. But to draw Fib Expansion we use 3 chart points to draw Fib Expansion.
To draw these Fibo Expansion zones we wait until the forex price retracement is complete & the forex currency pair begins to move in the original direction of the trend. Where the price retracement reaches and gets to is used as point 3 for drawing the Fib Expansion.
The forex example below shows the 3 Points where the Fibonacci Extension is drawn, labeled and marked as points 1, 2 & 3. 1 is where the forex trend started, 2 is where the forex trend pulled back and retraced & 3 is where the price retracement reached just as displayed on the illustration presented below.
Please note where these Fibo Extension levels are plotted - they are drawn above the Fibo Expansion indicator, these are the points and levels where the trader will place the take-profits.
Drawing Fibonacci Extension Levels on an Upward Trend
We use Fibonacci Extension Levels to try to project where the price movement will reach and get to. There are 2 important Fibonacci Expansion zones: 61.8 % Fibo Expansion and 100 % Fibo Expansion, these levels are used for taking profit and for setting take profits orders.
On the forex example below you as a forex trader can see that the Fibonacci Extension is drawn along the direction of the trend, since the trend is upwards - the Fibo Expansion is drawn upwards.
These Fibo Expansion levels are shown as horizontal lines above the Fib Expansion indicator, showing profit booking zones. In the exemplification displayed below if you had used of 100 % Fibo Expansion Level you would have made nice profit from the trade.
NB: This is the same trade from the previous example where we used Fib retracement to buy at around Fibonacci Retracement Level 38.2 %. At the same time we have used Fibonacci Expansion 100 % level to set take profit level. Now find a chart & practice these trading strategies.
From the above forex examples, the upwards trend continued & both 61.8 % & 100.0 % Fibonacci Extension Levels were all hit after which price retraced again after getting to the 100.0 % Fibo Expansion Level.
Drawing Fibo Expansion Areas on a Downward Trend
Since we use this Fibo Expansion tool to estimate take-profit levels, how do we draw it in a downwards trend?
We draw Fib Expansion from point 1 to 2 to 3 like shown below. Remember we always draw this Fibo Expansion tool in direction of the trend. In the illustration presented below, can you figure what direction we've drawn it? That is right - downward.
Try and see the difference between how we have drawn Fibonacci Expansion above and how it is drawn below. This time you'd also have used Fibonacci Expansion Level 100 %, see just where the price reached. That would have been a good take profit setting area.
From the exemplification revealed above, after plotting this Fibonacci Expansion tool there are 2 levels that are used to show the taking and booking profit zones, these 2 levels are drawn as horizontal lines across the forex price chart.
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