Information is not investment advice
Fibonacci expansion tool will help you pick your useful for picking profit targets when trading trends.
While plotting Fibonacci expansion, you have to take 2 price waves into account.
- The first wave (AB) represents the price movement in line with the main trend. The distance between points A and B is seen as 100% and used in further calculations.
- The second wave (BC) is a correction of the previous movement of the price. Its end in point C is the starting point from which the expansion levels are plotted in line with Fibonacci coefficients 0.618 or 61.8%, 1.618 or 161.8%. There are also optional expansions at the 2.618 and 4.236 levels.
Fibonacci expansion tool is used to find the location of the third wave (check Elliott wave theory).
To put it simply, you will need 3 points on the chart to apply the tool. Look for the start of a new trend: formation of a higher low after a downtrend (the first low, the interim high and the lower low will be used to project the expansions to the upside) or lower high after an uptrend (the first high, the interim low and the lower high will be used to project the expansions to the downside).
Choose the Fibonacci expansion tool in MetaTrader and connect the first 2 points with a line (points A and B on the chart below). Then select the instrument once again by clicking on the baseline you see on the chart and drag the third edge of the instrument to the third top or bottom (point C) without releasing the mouse. Adjust the line so that all 3 points are connected correctly (check that you placed the lines at candlesticks’ wicks).
How to trade using Fibonacci expansion
There are 2 logical places where you can enter the market:
- You can enter the trade on the basis of the Fibonacci retracement level (38.2%, 50%, or 61.8%) of the first wave, i.e. at point C.
- You can enter when the price moves beyond the end of the first wave, i.e. above point B.
Point D is where you put you Take Profit level. It’s located at the 161.8% expansion. If the trend is strong, the price may move further to the upside, so the 261.8% expansion is also a potential target.
2021-09-24 • Updated
Other articles in this section
- Reversal candlestick patterns
- Continuation candlestick patterns
- How to deal with market noise?
- How to backtest a trading strategy
- Gator Oscillator
- Awesome Oscillator
- Alligator indicator
- Bill Williams theory
- Chart patterns
- Uncovering Gann indicators
- How to create your own trading strategy?
- Candlestick patterns
- Trend trading
- Carry trade
- Swing trading
- Position trading
- Day trading
- Trading styles
- Trader's psychology
- How to identify market reversal
- Japanese Candlesticks
- Market conditions and phases