Fibonacci extension is a popular tool used in technical analysis to identify potential price targets for a financial asset. The tool is founded on the Fibonacci sequence, which is a series of numbers that occur frequently in nature and has been found to have relevance in financial markets. We will discuss in detail what the Fibonacci extension is, how it works, and how traders can use it to make more informed trading decisions.

What is Fibonacci Extension?

Fibonacci extension is a critical technical analysis tool that is used to identify potential price targets for a financial asset. It is based on the Fibonacci sequence, which is a series of numbers that occur frequently in nature. The sequence is formed by adding the previous two numbers in the series to create the next number. The sequence is as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, and so on.

The Fibonacci sequence is used in financial markets to identify potential price targets for a financial asset. The most commonly used Fibonacci extension levels are 38.2%, 50%, and 61.8%. These levels are used to identify potential price targets for a financial asset when the price has broken out of a previous high or low.

How Does Fibonacci Extension Work?

Fibonacci extension works by drawing horizontal lines at the Fibonacci extension levels on a chart. These lines can be used to identify potential price targets for a financial asset. The most commonly used Fibonacci extension levels are 38.2%, 50%, and 61.8%.

To use Fibonacci extension, traders need to identify the swing high and swing low of a financial asset. The swing high is the highest point reached by the asset, and the swing low is the lowest point reached by the asset. Once the swing high and swing low have been identified, the trader can use Fibonacci extension to identify potential price targets for the asset.

The Fibonacci extension levels are drawn by using the swing high and swing low as the starting point. The first level is drawn at 38.2% of the distance between the swing high and swing low. The second level is drawn at 50% of the distance between the swing high and swing low, and the third level is drawn at 61.8% of the distance between the swing high and swing low.

Traders can utilize these levels to identify potential price targets for a financial asset. For example, if a financial asset has broken out of a previous high, traders can use the Fibonacci extension levels to identify potential price targets for the asset.

How to Trade Using Fibonacci Extension?

Fibonacci extension can be used in combination with other technical analysis tools to identify potential trading opportunities. Traders can use Fibonacci extension to identify potential price targets for a financial asset and other technical analysis tools such as trend lines, support and resistance levels, and moving averages to confirm the validity of the trade.

1. Identifying the Swing High and Swing Low: The first step is to identify the swing high and swing low of the financial asset. Traders need to identify the highest and lowest points reached by the asset in a given period.

2. Drawing the Fibonacci Extension Levels: The second step is to draw the Fibonacci extension levels on the chart. Traders need to draw horizontal lines at the 38.2%, 50%, and 61.8% levels.

3. Identifying Potential Price Targets: The third step is to identify potential price targets for the financial asset. Traders can use the Fibonacci extension levels to identify potential price targets for the asset when it has broken out of a previous high or low.

4. Confirming the Trade: The fourth step is to confirm the trade using other technical analysis tools