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How To Use Fibonacci and Fibonacci Extensions

The document discusses how to use Fibonacci retracements and extensions when trading. [1] It explains how to identify "A to B" price moves and apply the Fibonacci retracement tool to find support and resistance levels. [2] Fibonacci retracement levels can be used as re-entry points during pullbacks or as support and resistance on lower timeframes. [3] Fibonacci extensions, specifically the 161.8 and 138.2 levels, can provide targets for take profit orders at the end of trends.

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430 views12 pages

How To Use Fibonacci and Fibonacci Extensions

The document discusses how to use Fibonacci retracements and extensions when trading. [1] It explains how to identify "A to B" price moves and apply the Fibonacci retracement tool to find support and resistance levels. [2] Fibonacci retracement levels can be used as re-entry points during pullbacks or as support and resistance on lower timeframes. [3] Fibonacci extensions, specifically the 161.8 and 138.2 levels, can provide targets for take profit orders at the end of trends.

Uploaded by

emailtodeep
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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How To Use Fibonacci And Fibonacci Extensions

The Fibonacci tool is very popular amongst traders and for good reasons.
The Fibonacci is a universal trading concept that can be applied to all
timeframes and markets. There are also countless Fibonacci tools from
spirals, retracements, Fib time zones, Fib speed resistance to extension.

In this article, I will explain how to correctly draw a Fibonacci sequence and
how to use the Fibonacci extensions for your trading.

How to draw Fibonaccis – just do it

Often, traders who have no prior experience with Fibonaccis are worried that
they are ‘doing it wrong’ and they then don’t use the Fibonacci tool at all. I
can assure you, there is no right or wrong when it comes to drawing
Fibonacci and you will also see that different traders use Fibonacci in slightly
different ways.

The Fibonacci levels are %-based which means that even when you draw
them differently, they will often line up correctly.

Step 1 –  Find an ‘A to B’ move


To use the Fibonacci retracements, you have to first identify an ‘A to B’ move
where you can use the Fibonacci retracement tool. What do we mean with ‘A
to B’?

A = the origin of a new price or trend move.  These are usually swing highs
and lows, or tops and bottoms.
B = Where the trend  move pauses and reverses to make a retracement. 

The following 4 screenshots show typical A to B


moves

 
 

Now let’s apply the Fibonacci retracement tool to the A to B moves. For that,
we pick the Fibonacci tool from your platform, select point ‘A’, drag it to ‘B’
and release it.

Connecting A to B moves with the Fibonacci


retracement tool
 
 

Step 2 – Find the retracement point C


After you have identified an A to B move and plotted your Fibonacci tool on
your charts, you should be able to find point C.

C = the point where the retracement ends and price reverses into the
original direction.
 

As you can see, the first 3 screenshots show the typical ABC move of a
Fibonacci retracement. Point C is very obvious on all three charts and price
bounced off the Fibonacci levels accurately.

 Finding the C-Fibonacci retracement level

click to enlarge

click to enlarge
click to enlarge

The fourth screenshot shows a scenario where price did not go back to the B-
Fibonacci level, but breaks the prior A-Fibonacci. It’s important to understand
that not all price moves will stop at a Fibonacci level. But, as you can see on
the fourth screenshot, the Fibonacci tool can be used to identify support and
resistance areas as well as we will explore in more detail shortly; the last
screenshot shows nicely how price reacts to several different Fibonacci levels
during the retracement.

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Tip #1: Trial and error

Especially for beginners, the following exercise will help you build a strong
foundation when it comes to drawing Fibonacci levels: Just grab the Fibonacci
retracement tool and try to put it on different spots, while observing how
price reacts to it. Usually, the more ‘snaps’ (price bouncing off a level) you
see, the more important the Fibonacci retracement is.

Tip #2: Don’t force a Fibonacci

Not every time you’ll be able to use a Fibonacci retracement to make sense
of a price move. If you can’t make the Fibonacci levels snap, don’t try to force
it. The best and most helpful Fibonacci retracements are those where you
don’t have to look long.

How to trade with Fibonacci


#1 Retracements as re-entries

The most common use for Fibonacci levels is the regular retracement
strategy. After identifying the ‘A to B’ move, you pay attention to the
retracement level C.

The screenshots below show a sudden bullish move in a larger uptrend.


Often, traders miss such sudden outbursts and then try to find re-entries
during pullbacks. The Fibonacci tool is ideal to identify swing-points during
pullbacks as the sequence indicates. With the Fibonacci retracement tool, a
trader would have been able to find 2 Fibonacci re-entries on the pullbacks.

 
[/sociallocker] Using Fibonacci retracements as re-entries in a trade – click to
enlarge

#2 Support and resistance

Another possibility to use Fibonaccis is to find an AB-Fibonacci move on a


higher timeframe and then go down to your regular timeframe and watch
the retracement levels as support and resistance guidelines.

The first screenshot below shows the Daily timeframe of the current
EUR/USD chart. As you can see, there was a regular ‘A to B’ move. The
screenshot in the bottom shows the same Fibonacci retracement but on the
lower, 4 hour timeframe. As you can see, throughout the whole time, price
reacted fairly accurately to the Fibonacci levels.

 
Daily timeframe with an ‘A to B’ Fibonacci move – click to enlarge

Fibonacci levels acting as support and resistance on a lower timeframe – click to enlarge

#3 Fibonacci levels for Take Profits – Fibonacci


Extensions

Finally, you can also use Fibonaccis for your take profit orders. Especially the
Fibonacci extensions are ideal to determine take profit levels in a trend. The
most commonly used Fibonacci extension levels are 138.2 and 161.8.

Most trading platforms allow you to add custom levels. Usually, the
parameters to add the Fibonacci extensions are:

-0.618 for the 161.8 Fibonacci extension


-0.382 for the 138.2 Fibonacci extension

The rules for take profit orders are very individual, but most traders use it as
follows:

A 50, 61.8 or 78.6 retracement will often go to the 161 Fibonacci extension
after breaking through the 0%-level. A 38.2 retracement will often come to a
halt at the 138 Fibonacci extension. The screenshots below show the
Fibonacci moves from the beginning and this time we applied the extensions
to the price moves. As you can see, the extensions provided great places for
take profit orders.

In my strategy, I use the Fibonacci extensions to find trends that have


completed an ABCD pattern and are likely to reverse. The Fib extension can
be of great help here.

A 78.6 retracement goes to the 161 Fibonacci extension – click to enlarge


A 50 retracement goes to the 168 Fibonacci retracement – click to enlarge

click to enlarge

Conclusion: Fibonaccis are multifunctional


The article demonstrated how to use Fibonaccis efficiently in your trading.
However, don’t make the mistake of idealizing FIbonaccis and believing that
they are superior over other tools and methods. Nevertheless, Fibonacci is a
great tool to have and can be used very effectively as another confirmation
method. Whether you are a trend following or a support and resistance
trader, or just looking for ideas how to place your take profit orders,
Fibonaccis are a great addition to your arsenal.

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