Fibo Extension Levels - Forex Analysis of Fibonacci Extension Levels in Charts

We have looked at Fibonacci retracement levels in the previous lesson, Fibo Retracement is drawn between 2 points. But to draw Fibonacci Expansion we use 3 chart points to draw Fibonacci Expansion.

To draw these Fibo Expansion zones we wait until the forex price retracement is complete & the currency pair starts to move in the original direction of the trend. Where the price retracement reaches is used as point 3 for drawing the Fibonacci Expansion.

The forex trading example below shows the 3 Points where the Fibo Extension is drawn, marked as points 1, 2 and 3. 1 is where the forex trend started, 2 is where the forex trend pulled back & retraced & 3 is where the price retracement reached as illustrated on the example below.

Please note where these Fibo Expansion zones are plotted - they are drawn above the Fibo Expansion indicator, these are the points where the trader will place the take-profit orders.

Drawing Fibonacci Extension Levels on an Upwards Trend

We use Fibo Extension Levels to estimate where the price movement will reach. There are two important Fibo Expansion zones: 61.8 % Fibonacci Expansion and 100 % Fibonacci Expansion, these levels are used for taking profit and for setting take profits orders.

On the forex trading example below you can see that the Fibo Extension is drawn along the direction of the trend, since the trend is upward - the Fibo Expansion is drawn upwards.

These Fibo Expansion levels are displayed as horizontal lines above the Fib Expansion indicator, showing profit taking areas. In the example 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 Fibonacci retracement to buy at around Fibo Retracement Level 38.2 %. At the same time we have used Fibo Expansion 100 % level to set take profit level. Now find a chart & practice these strategies.

From the above forex trading examples, the upward trend continued and both 61.8 % and 100.0 % Fibo Extension Levels were all hit after which price retraced again after getting to the 100.0 % Fibo Expansion Level.

Drawing Fibonacci Expansion Areas on a Downwards Trend

Since we use this Fibo Expansion tool to estimate take profit levels, how do we draw it in a down-wards trend?

We draw Fibonacci Expansion from point 1 to 2 to 3 as shown below. Remember we always draw this Fibo Expansion tool in direction of the trend. In the example below, can you figure what direction we have drawn it? That is right - downwards.

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 Fibo Expansion Level 100 %, see just where the price reached. That would have been a nice take profit setting area.

From the example above, after plotting this Fibo Expansion tool there are two levels that are used to show the profit taking areas, these two levels are drawn as horizontal lines across the forex price chart.