Finding support and resistance levels is a problem that most traders need to face, and identifying hidden support and resistance levels is even more difficult. The tools commonly used to identify support and resistance levels are trend lines and moving averages.
In the last issue of [Fibonacci Retracement Line], we learned that retracement lines can be combined with support and resistance levels to determine entry points. This issue shares another tool that can be used to identify hidden support and resistance levels: Fibonacci extension lines.
1. Understanding the Fibonacci extension line
Fibonacci extension lines are also called Fibonacci extension lines, which are lines other than the 100% retracement line, such as 161.8% and 261.8%. Commonly used horizontal lines of Fibonacci retracement lines are 23.6%, 38.2%, 50.0%, and 61.8%, which are used to show the actual fluctuation range of price retracement.
The part of the Fibonacci retracement line that exceeds 100%, that is, the part that exceeds the original high or low point, does not belong to the category of retracement, but to the category of extension or expansion. It is as important as the retracement line, and the price will also react to the same extent.
Here are the differences between the two
2. How to draw the Fibonacci extension line
Uptrend
Find the relative lows and highs, as well as the retracement points after the market continues, select the Fibonacci extension line tool, and connect the lows-highs-retracement points in sequence to bring up the Fibonacci extension lines. The retracement points can help us determine the support and resistance levels near that point.
On the one-hour chart of BYD, the Fibonacci extension line is called out. During the upward trend, the price encountered resistance at 0.382 and 0.5. Then a large positive line appeared, breaking through the 0.6 and 0.786 levels. There was a strong upward force, and it encountered resistance at 1. It broke through the resistance and continued to rise, breaking through the 1.618 extension line. The market broke through one extension line, which also means that it is likely to break through the next one.
As it turned out, after a period of correction, the market broke through the 2.618 extension line and continued to rise.
Downtrend
Select a falling market where the price moves from the high point of the trend to the low point. The high point is the first point, the low point is the second point, and the highest point of the retracement is the third point. Connect the high point - low point - retracement point in sequence to draw the extension line.
The figure below is the daily chart of Sany Heavy Industry. In the downward trend after the retracement point, it encountered support at the 0.618 level. After a few days, it fell to 1 and encountered strong support again. After the price pulled back to 0.618, it started a new round of decline, breaking through the 0.786, 1, and then breaking through the 1.618 extension line, which once again verified that if the market breaks through one extension line, it also means that there is a high probability that it will break through the next one.
In practice, the most commonly used horizontal lines for Fibonacci extensions are 161.8% and 261.8%, but 50.0%, 61.8%, 78.6%, and 100% are also important.
3. Practical Application
Finding the Take Profit Point – Combining Fibonacci Extensions and Retracements
For example, in the daily chart of USD/CHF, during a certain uptrend, the price repeatedly tested the 0.5 retracement level and then started to rise. Use the Fibonacci extension line to find the take profit level. The extension line shows that the price rebounded to the 0.618 level, the price was close to the previous high, and then the price was set to the 0.382 level.
The price then continued to rebound and encountered resistance at the 1 Fibonacci extension level, so the trader would have made a profit by setting take-profit levels at the 0.618, 1, and 1.618 extension levels.
If the price breaks out of the extension line, it will also break out of the next one, which means that the distance between the Fibonacci extension levels is equivalent to the potential profit space.
One thing to note is that the price will not fall exactly on the extension line every time, but the area around it is of reference value.
Set stop loss position
Take the rising trend of USD/JPY as an example. After the retracement point, the price is supported at the 0.5 level, as shown by the arrow in the figure, which can be used as the entry point, and the stop loss is set at the extension line below 0.382. The corresponding take profit can be set at the extension line above the entry point at 0.618. There are many factors that affect price fluctuations. When setting take profit and stop loss, you should not only refer to the signal from one tool, but should combine the signals given by multiple signals to decide.
Summarize
From the above analysis, we can know that the Fibonacci extension line does not provide a specific entry point, but an entry area. No tool is 100% accurate, and the price will not reverse at any extension line position every time, so we should combine other technical tools when operating, confirm the signal, and respond flexibly.
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