# Chapter 10, Part VII. Fibonacci Extensions. Page 3

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 16, 2013.

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1. ### Sive Morten Special Consultant to the FPA

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Commander in Pips: To better understand it, let’s look at formula for their calculation:

Extension = (A-X)*ratio + B

For instance, if we want to calculate 0.618 extension, then it turns to (A-X)*0.618+B. So, estimate for me 0.618 and 1.0 extensions from our chart #3.

Pipruit: Ok, let’s see. X=1.3411, A=1.3697 and B=1.3510. So –

Extension “0.618” = (1.3697-1.3411)*0.618 + 1.3510 = 1.3687, and

Extension “1.0” = (1.3697-1.3411)*1.0 + 1.3510 = 1.3796… Cool.

Wow! I think I’ve got it! Extensions stand above the market because we start to count extension not from “X” point, but from “B” that is higher. So, we calculate the length of the whole swing by (X-A), then apply the extension ratio – 0.618, 1.0 or whatever and then count it higher from “B” point.​

Commander in Pips: You’re absolutely right. “1.0” and other above 1.0 Extensions will be always above the “A” point of initial swing, but 0.618 could be as higher then A as lower. Can you tell me why?

Pipruit: Hm, the only answer that I have is a depth of retracement. If retracement was deeper than 0.618, then 0.618 Extension will be below A, if rather it was upper than 0.618 or equal to it – then 0.618 extension will be higher or equal A point.

Commander in Pips: Very good. You’re absolutely right. Just to simpler understand the nature of expansion, treat it like follows. Imagine that you jump on trampoline. First, you just stand on it and then make the first jump up – this is initial thrust up, i.e. “X-A” swing. Then you move down under gravity and tramp is forcing and stretching under your weight – this is “A-B” move. Then the trampoline straightens out and moves you up again – this is extension. Extension could be different, depending on how strong your initial jump up was. So, let’s take a look at next chart – here you will see 1.618 target level:

Chart#4 EUR/USD 4-hour chart

Pipruit: Wow, I see. By the way, Commander – here we see that 0.618 expansion target (marked with blue dash line) is below A. So, “A-B” retracement was a bit lower than 0.618 Fib support, wasn’t it?​

Commander in Pips: Yes, take a look at chart #2 – the low at point B is a bit deeper than 0.618 Fib support.

Pipruit: Commander, it’s amazing, how market reacts on reaching these targets! When it has hit 1.0 extension – it has shown retracement. Market has hit 1.618 and then has formed an Evening star and reversed down – unbelievable!​

Commander in Pips: Yes, extension is a really powerful tool. Here you can see, by the way, that extension also could be used together with other tools – here we use candlesticks with an extension, but trend lines and support/resistance lines could be used as well.

Pipruit: Now I see why any of these targets is very important and could be treated as profit taking point. I’m shocked!​

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Lasted edited by : Mar 6, 2016
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