Fibonacci Extensions

Definition

Fibonacci Extension is a tool used by traders to determine profit targets or estimate how far a price may move after a retracement. Extension levels can also indicate areas where price reversals might occur. These levels are plotted on a chart by connecting points based on Fibonacci ratios, expressed as percentages. Common Fibonacci extension levels include 61.8%, 100%, 161.8%, 200%, and 261.8%.

Origin

The Fibonacci Extension originates from the Fibonacci sequence introduced by Italian mathematician Fibonacci in the 13th century. This sequence is prevalent in nature and financial markets, and its ratio relationships are used in technical analysis to predict market movements.

Categories and Features

Fibonacci Extensions are primarily used in technical analysis to help traders identify potential support and resistance levels. They are characterized by calculating extension levels through historical price highs and lows, often used in trending markets. The advantage is providing clear price targets, while the disadvantage is the need to confirm signals with other indicators.

Case Studies

In 2009, Apple Inc.'s stock began to rebound after the financial crisis. Traders used Fibonacci Extensions to predict potential price targets, finding the 161.8% extension level as a significant resistance point. In 2017, during Bitcoin's rapid price increase, traders also used Fibonacci Extensions to identify potential price targets and retracement points.

Common Issues

Investors often misunderstand Fibonacci Extensions as absolute price prediction tools, overlooking their nature as probabilistic tools. Another common issue is over-reliance on a single indicator without integrating other technical analysis tools for comprehensive judgment.