Fibonacci Extension is a powerful trading tool, from basic to advanced usage.

Introduction: The Natural Ratios in Financial Markets

The natural ratios that appear in our world—whether in seashells, sunflower petals, or even favorite paintings—all share a mysterious proportion. That same proportion also appears in financial markets. Known as Fibonacci, in trading, Fibonacci Extension is a tool that helps us accurately predict target price points when prices break through resistance levels.

The History and Origin of Fibonacci Numbers

Although the name “Fibonacci” was coined during medieval Europe, the history of this number sequence predates centuries. Indian mathematicians discovered it between 400-200 BCE and used it in Indian society since the early 200 BCE.

Later, Leonardo da Vinci applied these proportions in art and design, making them widely known in the art world. However, in modern times, Fibonacci Extension and other Fibonacci tools have become essential weapons for traders and market analysts worldwide.

The Structure of Fibonacci Numbers: A Mathematical Marvel

Basic Number Sequence

Fibonacci numbers are generated by adding the two preceding numbers:

• 0 + 1 = 1
• 1 + 1 = 2
• 1 + 2 = 3
• 2 + 3 = 5
• 3 + 5 = 8
• 5 + 8 = 13

And so on, forming the sequence: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181, 6765…

The Hidden Golden Ratio

The true marvel of this sequence is that no matter what mathematical operation you perform, the result always yields the same value:

• Dividing a number by the next number (such as 34/55) gives approximately 0.618
• Dividing a number by the previous number (such as 377/233) gives approximately 1.618
• Dividing a number by the number two places ahead (such as 610/1597) gives approximately 0.382

These ratios form the basis of all Fibonacci tools used in trading, including Fibonacci Extension, which deeply utilizes these proportions.

Fibonacci Extension: A Tool for Profit Targets

Meaning and Benefits

Fibonacci Extension is designed to predict price levels when an uptrend or downtrend breaks out (Breakout) from resistance or support levels. While Fibonacci Retracement helps identify entry points, Fibonacci Extension accurately pinpoints exit points from positions (Exit Point).

How to Use Fibonacci Extension

To draw Fibonacci Extension lines, three basic points are needed:

1. Start of the main trend (Swing High or Swing Low)
2. Correction point (Correction Point)
3. Breakout point (Breakout Point)

Once these three points are connected, the system displays several horizontal levels: 113.6%, 127.2%, 141.4%, 161.8%, 200%, 261.8%, each representing potential price targets.

Using Fibonacci Extension with Other Tools

Fibonacci Extension + EMA: Confirm Trends and Find Targets

Steps:

1. Set up EMA(50) to identify the main trend direction

   • Price above EMA = bullish trend
   • Price below EMA = bearish trend

2. Wait for price to break above resistance or breakout from support levels

3. Draw Fibonacci Extension connecting the breakout point to find target prices

4. Close positions when price retraces from Fibonacci Extension levels

Fibonacci Extension + RSI: Confirm Momentum Changes

RSI (Relative Strength Index) indicates whether the price is overbought or oversold, and most importantly, can signal RSI Divergence.

Method:

1. Draw Fibonacci Extension to identify target prices
2. Observe RSI as price approaches each target level
3. Sell when Bearish Divergence occurs (price makes new highs but RSI makes lower highs)
4. Buy back when Bullish Divergence occurs (price makes new lows but RSI makes higher lows)

Fibonacci Extension + Price Action: Confirm with Candlestick Patterns

Standard traders often confirm Fibonacci Extension signals with reversal candlestick patterns such as:

• Doji indicating market indecision
• Engulfing signaling trend reversal
• Hammer/Shooting Star indicating decision points

Practical Application: Trading Examples

Case 1: Uptrend Trading with Fibonacci Extension

Scenario: AUD/USD shows a clear uptrend

1. Price starts from point A (Low) = 0.6500
2. Reaches point B (High) = 0.6700 (Enter long here)
3. Retraces to point C (Correction) = 0.6600
4. Draw Fibonacci Extension connecting A → B → C
5. First target: 0.6875 (127.2%)
6. Second target: 0.6950 (161.8%)

Case 2: Downtrend Trading with Fibonacci Extension

Scenario: EUR/USD shows a downtrend

1. Price drops from point A (High) = 1.0900
2. Reaches point B (Low) = 1.0700 (Enter short here)
3. Rebounds to point C (Rebound) = 1.0800
4. Draw Fibonacci Extension connecting A → B → C
5. First target: 1.0577 (127.2%)
6. Second target: 1.0480 (161.8%)

Differences Between Fibonacci Extension and Other Fibonacci Tools

Frequently Asked Questions

Is Fibonacci Extension reliable?

It works well, but must be used wisely. Fibonacci Extension is not a crystal ball; success depends on:

• Trend significance — longer, stronger trends work better
• Confirmation from other tools — RSI, EMA, Price Action improve accuracy
• Risk management — clear Stop Loss is essential

What timeframe is suitable for Fibonacci Extension?

Fibonacci Extension predictions work across all timeframes:

• Short-term (1m - 15m) — easy to read, suitable for Scalping
• Mid-term (1h - 4h) — reasonably accurate, good for Swing Trading
• Long-term (1D+) — highest accuracy, ideal for Position Trading

Should Fibonacci Extension be used alone or combined with other tools?

Never use it alone; combining it reduces risk of loss. Recommended to pair with:

• Oscillators (RSI, MACD, Stochastic)
• Trend indicators (EMA, SMA)
• Other support/resistance levels
• Price Action patterns

Advantages and Disadvantages of Fibonacci Extension

Advantages ✓

• Easy to use, straightforward
• Provides clear price targets
• Effective in strong trending markets
• Compatible with various tools
• Widely accepted by top traders

Disadvantages ✗

• Not 100% accurate in choppy markets
• Subjective in identifying correct Swing High/Low
• Should be part of a trading system, not the sole confirmation
• Sometimes leads traders to over-rely on it

Trading Examples Based on Different Signals

Buy Signal

Appears when:

• Price completes correction (Retracement)
• Breaks previous High
• Moves upward with momentum
• Draw Fibonacci Extension → target levels at 161.8%, 200%

Entry method:

• Enter long at breakout or EMA retest
• Set Stop Loss below latest Low
• Targets: 127.2%, 161.8%

Sell Signal

Appears when:

• Price rebounds (Rebound)
• Breaks previous Low
• Moves downward with momentum
• Draw Fibonacci Extension → target levels at 127.2%, 161.8%

Entry method:

• Enter short at breakdown or EMA retest
• Set Stop Loss above latest High
• Targets: 127.2%, 161.8%

Summary: Why Fibonacci Extension Matters to Traders

Fibonacci Extension aligns with natural laws and market behavior. Whether in Forex, Crypto, Stocks, or Commodities, all follow these ratios because humans tend to trade at significant price levels.

Traders worldwide, including major investment banks, use the same tools, making Fibonacci Extension ratios highly effective.

Once you deeply understand Fibonacci Extension and learn how to combine it with other tools like EMA, RSI, and Price Action, your trading will advance significantly with increased accuracy.

Try Fibonacci Extension today and discover how this natural proportion tool can transform your trading approach.