Fibonacci Extensions
Key takeaways
* Fibonacci extensions are charting levels used to project where a price wave may move after a retracement, commonly used to set profit targets or identify potential reversal areas.
* They are drawn by selecting three points on a chart (start of a move, end of a move, end of the retracement) and applying Fibonacci ratios to the size of that move.
* Common extension levels: 23.6%, 38.2%, 50%, 61.8%, 78.6%, 100%, 161.8%, 200%, 261.8%.
* Use extensions alongside other tools (price action, candlesticks, trendlines, volume) because they indicate possible areas of interest, not certainties.
What Fibonacci extensions are
Fibonacci extensions are horizontal price levels derived from Fibonacci ratios that estimate how far a market may travel following a pullback. Traders use them to:
* Set profit targets.
* Identify possible support or resistance when other methods aren’t applicable.
* Find confluence when multiple waves’ extensions cluster at the same price.
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How to draw and calculate extensions
- Choose three points:
- Point 1 — start of the initial move (swing low in an uptrend).
- Point 2 — end of the initial move (swing high).
- Point 3 — end of the retracement against that move (higher low in an uptrend).
- Measure the price difference between points 1 and 2 (the initial move).
- Multiply that difference by desired Fibonacci ratios (e.g., 0.618, 1.0, 1.618).
- For an upward projection, add the resulting dollar amounts to point 3’s price; for a downward projection, subtract them.
Example
* Price moves from $10 (point 1) to $20 (point 2), then pulls back to $15 (point 3).
* Move size = $20 − $10 = $10.
* 61.8% extension = 0.618 × $10 = $6.18 → projected level = $15 + $6.18 = $21.18.
* 100% extension = 1.0 × $10 = $10 → projected level = $15 + $10 = $25.
Where the ratios come from
Fibonacci ratios derive from the Fibonacci number sequence: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, …
* Dividing a number by the previous number approaches 1.618 (the golden ratio).
* Dividing by two places left approaches 2.618; by three places approaches 4.236.
Common extension levels are based on these limits and include non-Fibonacci multiples (100%, 200%) because they project equivalent or multiple moves.
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Practical uses and interpretation
- Targets and exits: Traders use extensions to plan where to take profits or scale out.
- Support/resistance areas: Extensions mark zones where price might stall or reverse; expect the market to react to the area, not necessarily the exact price.
- Timeframes and confluence: Extensions work on any timeframe. When extensions from different waves or timeframes cluster, that area gains significance.
- Flexibility: Price can overshoot, stall before, or ignore a given level; extensions are probabilistic tools.
Fibonacci extensions vs. retracements
- Retracements measure how deep a pullback is within a trend (common retracement levels: 23.6%, 38.2%, 50%, 61.8%, 78.6%).
- Extensions measure how far the next impulse (continuation) wave could travel after the retracement.
Limitations and best practices
- Do not rely on extensions alone for trade decisions.
- Combine with other analysis: trendlines, moving averages, momentum indicators, candlestick patterns, and volume to confirm likely reversals or targets.
- There’s no guarantee price will reach or respect any particular level; which level—if any—becomes relevant is only known in hindsight.
- Use position sizing and risk management, because price can move through several extension levels quickly.
Summary
Fibonacci extensions are a simple, widely used tool to project potential price targets after a retracement. They are most effective when used as part of a broader trading plan that includes confirmation from other technical tools and sound risk management.