Fibonacci extension levels are quite helpful in understanding market reversals and potential resistances. Simply put, Fibonacci extension levels are the critical points from which the price of a specific stock, currency pair, or commodity may change.
Fibonacci extension levels help traders in locating and validating key regions of support and resistance as well as potential trend reversal points. They are a fantastic tool for predicting their overall bias for a bullish or bearish trend. However, just like with Fibonacci retracement levels, you must apply the Fibonacci extension levels in combination with your present working technique. The extension levels just serve to emphasize the significance of a level, not to indicate that the price will necessarily turn around at this time.
Fibonacci Extension trading: How does it work?
The most frequent Fibonacci extensions levels are 423.6%, 261.8%, and 161.8%. The above-proven ratio appears as the number increases, despite the ratio maybe slightly distorted at the start of the sequence. The other significant resistance levels using Fibonacci extensions are at 50%, 61.8%, 78.6%, and 100%, even though these are quite a distance away from each other.
The general rule when trading long in an uptrend is to exit at a Fibonacci Price Extension Level. Three mouse clicks are used to calculate the Fibonacci extension levels. Click on a significant Swing Low first, then move your mouse over the most recent Swing High. Finally, return the cursor to the bottom of the chart and click any retracement level.
The basic rule is to exit a short trade at a Fibonacci extension level during a downtrend since the market frequently finds support there. Let’s review the downtrend on the 4-hour BTC/USDT chart.
The price has clearly touched and is currently taking a little breather at the 0.236 Fib Extensions levels. For the above sell order, these are the profit-taking zones. We had the option of withdrawing profits at the levels of 38.2%, 50.0%, or 61.8%. All of these levels served as support, probably as a result of other traders watching for these levels to take profits as well.
The examples show that although not always, price does encounter some temporary support or resistance at the Fibonacci extension levels, which is frequently enough to allow you to effectively adjust your position to maximize gains and minimize risks. Naturally, there are certain issues to resolve in this situation.
You should be particularly interested in the Fibonacci retracement levels of 23.6%, 38.2%, 50%, 61.8%, and 76.8%. 38.2, 50, and 61.8 are the most crucial values. In most trading platforms, these thresholds are set by default. Fibonacci levels are often used by traders as potential levels of support and resistance. 38.2%, 50%, 61.8%, 100%, 138.2%, and 161.8% are the Fibonacci Extension levels.
Fibonacci extensions are used by traders to define profit targets as regions of support and resistance. Fibonacci can be used efficiently when paired with support and resistance, trend lines, and candlestick patterns to determine entry and stop loss levels.
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