What is the Trend Based Fibonacci Extension?
The Trend-based Fibonacci extension, available on trading platforms such as Finlogix, LogixTrader, MT4, and MT5, is a tool derived from Fibonacci retracement that identifies key price levels by tracking a price’s primary move and its retracement.
The resulting price levels that are drawn on the chart represent potential support and resistance in the subsequent movement.
How to Use the Trend-Based Fibonacci Extension for Finding Profit Targets and Reversal Areas
In this way, it can help establish profit targets on trend trades or alert a trader to where potential trend reversal areas could develop.
In an upward trending, the price action will sometimes temporarily move counter to the trend.
In the period of pullback or retracement, once this counter move is exhausted, price resumes back in the direction of the primary trend and often times will break to new highs.
In this case, the Fibonacci extension can be applied in the chart.
The chart above shows the example when we use this tool to help set some profit targets (0.236, 0.382 and 0.5), seen as resistance level, in the EUR/USD daily chart after retracement.
Any successful breakout may lead to the next level of profit target.
Moreover, those levels can also be seen as support levels when it pullbacks.
On the other hand, for investors or traders looking to sell short, the price levels created by the Fibonacci extension serve the same purpose in a downtrend.
What type of trader would use the Trend Based Fibonacci Extension?
The Trend-Based Fibonacci Extension is commonly used by the following types of traders:
Trend Traders: They use Fibonacci extensions to identify potential profit targets and continuation levels within an existing trend.
Swing Traders: They rely on Fibonacci extensions to determine key price levels where the market may extend beyond a retracement, allowing them to capture larger price movements.
Day Traders: They utilise Fibonacci extensions on shorter timeframes to pinpoint potential intraday resistance and support levels for quick trades.
Breakout Traders: They use Fibonacci extensions to identify possible breakout levels where price may accelerate beyond a prior high or low.
Technical Analysts: They incorporate Fibonacci extensions into their analysis to align with other technical indicators such as moving averages, trendlines, and price patterns for confirmation.
Forex and Stock Traders: Traders in forex, stocks, and commodities use Fibonacci extensions to forecast potential price targets in various markets.
This tool is especially valuable for traders looking to project future price movement and set strategic profit-taking or stop-loss levels.
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