The next use of Fibonacci will be to use it to find price targets. You always have to remember the zombie rule – if you are in doubt, know the way out! Let’s start with an example in an uptrend. In an uptrend, the general assumption is that profits from buy-in transactions will be taken at the Fibonacci extension level.
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How to draw a Fibonacci extension
You can specify Fibonacci extension levels with three mouse clicks. First click on an important floor swing, then drag the cursor and place and click on the last swing ceiling (roof swing). Finally, drag your cursor down and click on each of the correction levels.
This shows each of the extension levels, which shows both the ratio and the corresponding price level. How much trim, no? Let’s go back to the USD / CHF chart we showed you in the previous lesson.
How to use Fibonacci extensions in the uptrend
Use Fibonacci extensions to set a profit margin
The Fibonacci retracement level of 50.0% has acted strongly and after three tests, the pair has finally resumed its uptrend. In the chart above, you can even see the price increase above the previous swing ceiling. Let’s use the Fibonacci Extension tool to see where it’s been a good place to make a profit.
Use Fibonacci extensions to set a profit margin
Here is a summary of what happened after the correction floor price occurred:
- The price climbed to the level of 61.8%, which was close to the level of the previous fluctuation.
- It poured back to the level of 38.2% and was supported there.
- Then the rally price went up, which found itself at the level of 100% resistance.
- A few days later, the price rose again to 161.8% before the resistance.
As you can see in the example, the levels of 61.8%, 100% and 161.8% were all good places to make a profit. Now, let’s look at an example of using Fibonacci extension levels in a downtrend. In the downtrend, the general assumption is to make a profit on sales at the Fibonacci Extension level because the market is often supported at these levels.
Let’s take a look at the downtrend in the 1-hour EUR / USD chart that we showed you in the Fibonacci candlelight lesson.
How to use Fibonacci extensions in a downtrend
Use Fibonacci extensions to set a profit margin
Here, we see a Dodge figure just below the 61.8% Fibonacci level. With the return of sellers, the trend returned and lowered the price to the bottom of the fluctuation. Let’s take a look at the Fibonacci Extensions tool to see where the good profits would be if we had sold at the 61.8% Fibonacci level.
Use Fibonacci extensions to set a profit margin
Here is what happened after the price returned from the Fibonacci correction level:
- The price saw support at the level of 38.2%.
- The level of 50.0% was maintained as the first support and then became the area of expression of interest.
- The level of 61.8% also became an area of interest before the price went down to test the previous volatility floor.
- If you look ahead, you will see that the 100% expansion level has also acted as support.
We could have made a profit of 38.2, 50.0 or 61.8%. All of these levels acted as support, probably because other traders’ eyes were on these levels to make a profit.
Conclusion:
These examples show that the price gets at least some temporary support or resistance at the Fibonacci levels of extension – not always, but as much as helping you to position and manage risk correctly. Of course, there are issues that need to be resolved here.
First, there is no way to know exactly which level of Fibonacci resistance. Each of these levels may act as support or resistance. Another problem is determining which oscillation floor to start with to draw Fibonacci extension levels. One way is to do this from the last swing floor we did in the examples. Another way is to do this from the lowest oscillation floor of the last 30 candlesticks.
However, there is no exact way to do this, but with a lot of practice, you will make better decisions in choosing swing points. You need to use your insight and tact in using the Fibonacci extension tool. You have to judge how long the current trend will last. Later, we will teach you ways to help you understand the power of a process.
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