Fibonacci Expansion Levels - Forex Analysis of Fibonacci Expansion Levels in Forex Charts
We have looked at Fibonacci retracement levels in the previous lesson, Fibonacci Retracement is drawn between 2 points. But to draw Fibonacci Expansion we use 3 chart points to draw Fibonacci Expansion.
To draw these Fibonacci Expansion levels we wait until the forex price retracement is complete and the currency pair starts to move in the original direction of the forex 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 Fibonacci 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 and retraced and 3 is where the forex price retracement reached as shown on the example below.
Please note where these Fibonacci Expansion levels are drawn - they are drawn above the Fibonacci Expansion indicator, these are the points where the forex trader will set the take profit orders.
Drawing Fibonacci Expansion Levels on an Upward Trend
We use Fibonacci Extension Levels to estimate where the forex price movement will reach. There are 2 important Fibonacci Expansion levels; 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 Fibonacci Extension is drawn along the direction of the forex trend, since the forex trend is upward - the Fibonacci Expansion is drawn upwards.
These Fibonacci Expansion levels are displayed as horizontal lines above the Fibonacci Expansion indicator, showing profit taking areas. In the example below if you had used of 100 % Fibonacci 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 Fibonacci Retracement Level 38.2 %. At the same time we have used Fibonacci Expansion 100 % level to set take profit level. Now find a forex trading chart and practice these strategies.
From the above forex trading examples, the upward forex trend continued and both 61.8 % and 100.0 % Fibonacci Expansion Levels were all hit after which price retraced again after hitting the 100.0 % Fibonacci Expansion Level.
Drawing Fibonacci Expansion Levels on a Downward Trend
Since we use this Fibonacci Expansion tool to estimate take profit levels, how do we draw it in a downward forex trend?
We draw Fibonacci Expansion from point 1 to 2 to 3 as shown below. Remember we always draw this Fibonacci Expansion tool in the direction of the forex 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 would also have used Fibonacci Expansion Level 100 %, see just where the price reached. That would have been a nice take profit setting area.
From the example above, after drawing this Fibonacci 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.