What is a Fibonacci Extension?
Fibonacci extension is a tool that helps user (Trader/Investor) to find the areas of support and resistance of the stock’s price. It is also used to find the Target & Stop loss of the stocks.
It plots percentage extension lines based upon mathematical relationship within Fibonacci sequence. This extension provides support & resistance levels that can be used to target price objects.
How does it work?
Extensions are generated by drawing a trend line between 3 extreme points i.e. A to B & then B to C. This tool showcases horizontal lines intersecting the trend line at the Fibonacci levels of 100%, 138.20%, 161.80%, 200%.
Fibonacci extension levels are static prices that do not change, unlike moving averages. This allows traders and investors to anticipate and react prudently when the price levels are tested. These levels are inflection points where some type of price action is expected, either a rejection or a break.
Key points to remember:
- The golden levels of Fibonacci extensions are 100%, 131.20%, 161.80%, and 200%.
- To manually draw Fibonacci extensions, you have to draw a straight line that connects three points A->B->C
- Fibonacci can provide reliable trade setups, but not without confirmation. Applying additional technical tools like MACD or stochastic oscillators will support the trade opportunity and increase the likelihood of a good trade.