Fibonacci Extension, or Fibonacci Extensions, is an important technical analysis tool used by traders. To determine profit targets and predict the extent of price movement after the end of a pullback. So, what is the Fibonacci Extension? How to use and draw this tool in cryptocurrency trading? Let’s explore the details of Crypto Trading in the article below.
Learn about the Fibonacci extensions
One of the powerful trading tools is the Fibonacci Extensions. Fibonacci Extensions has become a great assistant in optimizing profits. Check out this information now to understand more about Fibonacci Extensions.
What is the Fibonacci Extensions?
Fibonacci extension is a technical analysis tool that uses Fibonacci levels to predict price targets beyond a previous high or low. This tool helps traders estimate the extent of price movement after a retracement is completed. Common Fibonacci extension levels include 61.8%, 100%, 161.8%, and 261.8%. They act as potential resistance and support levels in price trends.
In addition to using Fibonacci levels to determine entry and exit points in trading, you can also apply Fibonacci time zone to predict when peaks and troughs appear in price trends.
Levels Fibonacci extension
Fibonacci Extensions levels are the next price levels after the 100% level in the Fibonacci sequence. They are often used to predict potential price levels in a price trend. To identify potential price targets in an uptrend or downtrend of the market. They are based on the Fibonacci sequence, including important levels such as 61.8%, 100%, 161.8%, 261.8%, and 423.6%. These levels help traders predict where the price might reach. By using the Fibonacci extension, traders can determine reasonable profit-taking levels and optimize their trading strategies.
The Difference Between Fibonacci Retracement and Extension
In the Crypto market, when analyzing price trends, Fibonacci retracement is the end point of price correction in the opposite direction of the main trend. On the contrary, the Fibonacci Extension determines the end point of price when the main trend returns.
- Fibonacci retracement is the end point of a downward correction, suggesting a buy order. Meanwhile, Fibonacci retracement is the end point of an upward correction, suggesting a sell order.
- Fibonacci Extensions, as an auxiliary tool, helps to determine the limits of the main trend after each correction ends. For those who have opened orders based on Fibonacci retracement, the Fibonacci extension will assist in determining profit or exit points.
See more: Fibonacci: magic trading tool for every trader
How to Trade Fibonacci Extensions to Take Profit
Optimizing profits in cryptocurrency trading requires acumen and the use of appropriate technical analysis tools. There are 3 ways to trade with Fibonacci Trading that you can apply, specifically as follows.
Combining Fibonacci Trading Extensions with Support Resistance
The price will increase when it touches support and vice versa, decrease when it touches resistance. The strategy uses Fibonacci extension combined with important resistance levels. To determine the price zone that can close profits more effectively.
For example, on the GBP/USD H4 chart, we see strong support at 1.37525, combined with the 76.4% Fibo Extension level. We can set Take Profit at the 61.8% Fibo Extension level as a safe zone, or at the 76.4% Fibo Extension level.
Both of these levels have been strong supports in the past. However, taking a profit of 76.4% can provide a better profit. There is no guarantee that the price will continue to go to the Fibo Extension level without turning around. So if you want to take a risk to increase your profit, but still reduce your risk. You can apply a partial profit-taking strategy to ensure that you will make a profit even if the price changes direction.
Fibonacci Trading Extension with Japanese Candlestick Patterns
An effective trading method is to use Fibonacci Extensions in combination with Japanese candlestick reversal patterns. Compared to using only Fibonacci retracement with Japanese candlesticks, this method aims to detect reversal points in the main trend of the market. When a reversal candlestick pattern appears at a potential Fibo Extension level, the chance of a reversal can be high.
Example: After a sharp decline, the market creates a long bearish candle. The price then retraces and continues to fall to 0.70330. This pattern indicates that selling pressure is decreasing and the market may reverse. This is the time when you should close your sell position.
Trading Fibonacci Extensions combined with price channel
Channel trading is usually buying when the price hits the bottom and selling when the price hits the top. However, combining the Fibonacci Trading extension has additional rules to note. In an uptrend channel, you should only take profit when the price hits the top, and vice versa in a downtrend channel. Consider the profit position when Fibonacci and the price channel coincide to take profit. Do not trade against the trend to avoid risks, especially for new traders.
The example shows using Fibonacci Retracement to determine the buy point and then drawing the Fibonacci Extension. The price channel tool can be used to determine support and resistance levels. Take profit at the 76.4% or 1.0 Fibonacci Extensions level, but be careful of greed, it can lead to loss.
See more: MEXC: Open a MEXC account, invest effectively
How to draw Fibonacci Extension
By learning how to draw Fibonacci Extensions, you can open up opportunities to develop new trading strategies. Here are two drawing methods you can apply.
Fibonacci Trading Extension in Uptrend
How to draw Fibonacci extension in uptrend as follows:
- First, identify the uptrend and 3 key points: bottom (1), top (2) and reversal point (3).
- Drag the mouse from (1) to (2), then drag it to (3) – the end of the pullback. This is the Fibonacci Extensions in an uptrend.
- The ratio levels include 0, 0.236, 0.382, 0.5, 0.618, 0.764, 1, 1.236, 1.618, 2.618,… from bottom to top.
Traders often look at the 0.618 – 1.618 ratio as a potential profit-taking level. However, ratios below 0.618 are less popular because of the low risk. A ratio above 1.618 is often difficult to achieve unless the market is in a long-term uptrend or downtrend.
Fibonacci Extension in Downtrend Market
Here’s how to draw Fibonacci Extension in a downtrend:
- First, spot the downtrend and identify the top (1), bottom (2), and counter-trend (3).
- Then use the mouse drag tool from (1) to (2), then to (3), where the pullback ended. This will create a Fibonacci Extensions in a downtrend.
- Similar to the uptrend, the Fibonacci Extensions levels in the downtrend include 0, 0.236, 0.382, 0.5, 0.618, 0.764, 1, 1.236, 1.618, 2.618, etc. Potential profit points are between 0.618 and 1.618.
Conclude
The Fibonacci Extension is a useful technical analysis tool that can be applied to both bull and bear markets. Using it effectively requires a clear understanding of how it works and combining it with other technical analyses. We have helped you understand more about Fibonacci Extension and how to apply it in crypto trading. Hopefully, you will take advantage of this information to enhance your trading strategy. Don’t forget to follow Crypto Trading to stay updated with the latest information in the trading market.
Frequently Asked Questions
Which software supports drawing Fibonacci extensions?
Most popular trading software supports drawing Fibonacci Extensions, including MT4, MT5, TradingView, Coineal,…
Does the Fibonacci Extensions work in all markets?
Fibonacci extension can be applied to a wide range of assets, including stocks, currencies, commodities, and indices. However, its effectiveness may vary depending on the market and trading conditions.
How to combine the Fibonacci Extensions with other technical indicators?
Fibonacci Extensionscan be combined with other technical indicators. Such as MACD, RSI, and Bollinger Bands to increase the efficiency of analysis and signal confirmation.
