Part VII. Fibonacci Extensions
Commander in Pips: Greetings. In all previous parts of the current chapter we’ve talked about Fibonacci retracement – levels that could hold the market during retracement in the opposite direction to the initial swing. As you know, we use these levels for opening positions in the direction of the initial thrust with the hope that the market will continue this move after retracement. Today we will talk about how to estimate the target of this possible move after retracement.
Pipruit: Good morning, Sir. Let’s assume that we have an initial thrust up, then retracement where we’ve opened Long position from some Fib level and market continues its move up, as we’ve expected. And now we have to estimate the possible target of this continuation move up, right?
Commander in Pips: Yes, that’s correct. The target could be estimated with applying Fibonacci Extensions or Expansion – sometimes this tool is called like that. These are, in fact, the same.Pipruit: And why do we need that?
Commander in Pips: We may use this tool to estimate the area where the market could show some pause in a move, retracement or even a reversal. So, if we have position open already – this tool can show us level where we can take our profit or place a “Take profit” order. Also this tool has some advanced application – using extensions for estimation support and resistance levels and in combination with Fib retracement tool.
Pipruit: Cool! So, in a simple approach (without your brain cracking advanced parts) we use Fib retracement for entering and Fib extensions for exiting, right?
Commander in Pips: In a simple approach – yes. Ok let’s start with that and use a 4hour chart of EUR/USD. Suppose you see this picture – thrust up is developing currently, you see that looks like market takes a pause and possibly will show some retracement down. So you intend to join this thrust up and enter Long from one of retracement level. So, how do you intend to do that:
Chart#1 EUR/USD 4hour chart
Pipruit: Well, we need to draw Fib retracement levels. Also I see the trend line, I think that I will use it in combination with Fib support level, just to get more confidence.
Commander in Pips: This sounds logical. Let’s see, where you’ve entered:
Commander in Pips: Now let’s remember the ratios for Fib extensions – we’ve studied them in the first part of current chapter.
Commander in Pips: Brilliant. Now let’s see how we could apply them here. The major idea here is as follows:
 During an uptrend we should enter Long from retracement level and take profits at Fibonacci Price extension levels;
 During downtrend we should enter Short from a retracement level and take profits at Fibonacci Price extension levels.
To estimate and draw these extension levels you should accomplish threeclick procedure:
In uptrend:
1. Click on significant swing low. For example, this could be any X point, according to our terminology;
2. Drag your mouse to significant swing high. It could be an “A” point, for instance,  most recent swing high, but this is not absolutely necessary;
3. Then drag your mouse to the most recent low, from which recent up move has reestablished – this will be the low of the market that usually stands around deepest retracement level that has held market during retracement.
(NOTE: In MT4, you must first select Insert, Fibonacci, Expansion.)
Look at this chart:
Commander in Pips: This sounds logical. Let’s see, where you’ve entered:
Chart#2 EUR/USD 4hour chart
You have had a nice entry – in combination of 0.618 Fib support and trend line. But major question now is where to fix profit?
Pipruit: And where?
Commander in Pips: Now let’s remember the ratios for Fib extensions – we’ve studied them in the first part of current chapter.
Pipruit: Ok, just one second, Sir, I remember – 0.618; 1.0; 1.272; 1.618; 2.0; 2.618.
Commander in Pips: Brilliant. Now let’s see how we could apply them here. The major idea here is as follows:
 During an uptrend we should enter Long from retracement level and take profits at Fibonacci Price extension levels;
 During downtrend we should enter Short from a retracement level and take profits at Fibonacci Price extension levels.
To estimate and draw these extension levels you should accomplish threeclick procedure:
In uptrend:
1. Click on significant swing low. For example, this could be any X point, according to our terminology;
2. Drag your mouse to significant swing high. It could be an “A” point, for instance,  most recent swing high, but this is not absolutely necessary;
3. Then drag your mouse to the most recent low, from which recent up move has reestablished – this will be the low of the market that usually stands around deepest retracement level that has held market during retracement.
(NOTE: In MT4, you must first select Insert, Fibonacci, Expansion.)
Look at this chart:
Chart#3 EUR/USD 4hour chart
See – I use as swing low our initial low, that is also is “X” point, the swing high – our “A” point for swing estimation, as we’ve discussed in advanced comments. “B” point is a low from which up move reestablishes – it stands around deepest retracement level that has held market during retracement. AS you remember this is around 0.618. All markings are according to rules. Bingo – software shows us extension levels – 0.618 at 1.3687, 1.0 at 1.3796, on later chart you’ll see 1.618 also.
Pipruit: And why are all extension levels except 0.618 above the market during uptrend (and I suppose they will be below the market during down trend)?
Commander in Pips: To better understand it, let’s look at formula for their calculation:
Extension = (AX)*ratio + B
For instance, if we want to calculate 0.618 extension, then it turns to (AX)*0.618+B. So, estimate for me 0.618 and 1.0 extensions from our chart #3.
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?
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. “XA” swing. Then you move down under gravity and tramp is forcing and stretching under your weight – this is “AB” 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:
Commander in Pips: Yes, take a look at chart #2 – the low at point B is a bit deeper than 0.618 Fib support.
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.
Commander in Pips: To better understand it, let’s look at formula for their calculation:
Extension = (AX)*ratio + B
For instance, if we want to calculate 0.618 extension, then it turns to (AX)*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” = (1.36971.3411)*0.618 + 1.3510 = 1.3687, and
Extension “1.0” = (1.36971.3411)*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 (XA), then apply the extension ratio – 0.618, 1.0 or whatever and then count it higher from “B” point.
Extension “0.618” = (1.36971.3411)*0.618 + 1.3510 = 1.3687, and
Extension “1.0” = (1.36971.3411)*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 (XA), 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.
Chart#4 EUR/USD 4hour 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, “AB” 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!
Commander in Pips: Ok, now, let’s take a look at a down thrust. But here I want you to mark Fib retracement and expansions.
In a downtrend:
During a downtrend we should enter Short from Fibonacci resistance level and take profits at Fibonacci Price extension levels. To estimate and draw these extension levels you should accomplish threeclick procedure:
1. Click on significant swing high. For example, this could be any X point, according to our terminology;
2. Drag your mouse to significant swing low. It could be an “A” point, for instance,  most recent swing low, but this is not absolutely necessary;
3. Then drag your mouse to the most recent high, from which the recent down move has reestablished – this will be the high of the market that usually stands around highest retracement level that has held market during retracement.
Commander in Pips: Here is your chart – let’s assume, that you’ve seen this evening star and followed the swing down. So you intend to enter short:
Chart#7 EUR/USD 4hour chart
Commander in Pips: Ok, now, let’s take a look at a down thrust. But here I want you to mark Fib retracement and expansions.
In a downtrend:
During a downtrend we should enter Short from Fibonacci resistance level and take profits at Fibonacci Price extension levels. To estimate and draw these extension levels you should accomplish threeclick procedure:
1. Click on significant swing high. For example, this could be any X point, according to our terminology;
2. Drag your mouse to significant swing low. It could be an “A” point, for instance,  most recent swing low, but this is not absolutely necessary;
3. Then drag your mouse to the most recent high, from which the recent down move has reestablished – this will be the high of the market that usually stands around highest retracement level that has held market during retracement.
Pipruit: Ok, I’ll try.
Commander in Pips: Here is your chart – let’s assume, that you’ve seen this evening star and followed the swing down. So you intend to enter short:
Chart#5 EUR/USD 4hour chart
Pipruit: Ok, here are the Fib retracement levels:
Chart#6 EUR/USD 4hour chart
Pipruit: And when I am sure that we’ve got our “B” point – the highest point of retracement up  we draw expansions:
Chart#7 EUR/USD 4hour chart
Pipruit: Commander, I’m stunned again – the market has turned up precisely at the 1.0 extension level.
Commander in Pips: You did all things correctly. But here some important notifications to Fibonacci extensions:
1. You never can say definitely where the market will show a major reversal  at 0.618, 1.0 or 2.186 level. All that you can say, that there is a solid probability that any of these extension levels will act as support or resistance (depending on direction), at least temporally.
2. Still there are some methods that exist which allow us make some assumption about how far the market could move – 0.618, 1.0 or even 2.618. It depends on trend strength. We will talk about it in later chapters;
3. There is some uncertainty existing about which points to use as “X”, “A” and “B”. But after some time when you will get more experience you will better understand how to recognize the most important of them;
4. Still…
 The extension from major low of the swing (X point) always significant;
 The extension from strong thrust move is more significant than an extension from a slower move;
 It is preferable (but not absolutely necessary), that B point should be at least at the 0.382 retracement levels. Other words, AB retracement move should be easily viewed.
 The most recent expansion very often becomes important.
 “B” point should be always inside XA swing and after the “A” point in time, when you are dealing with expansions for profit taking.
Some more information we will uncover in the advanced part that is dedicated to Fib expansions.
Commander in Pips: You did all things correctly. But here some important notifications to Fibonacci extensions:
1. You never can say definitely where the market will show a major reversal  at 0.618, 1.0 or 2.186 level. All that you can say, that there is a solid probability that any of these extension levels will act as support or resistance (depending on direction), at least temporally.
2. Still there are some methods that exist which allow us make some assumption about how far the market could move – 0.618, 1.0 or even 2.618. It depends on trend strength. We will talk about it in later chapters;
3. There is some uncertainty existing about which points to use as “X”, “A” and “B”. But after some time when you will get more experience you will better understand how to recognize the most important of them;
4. Still…
 The extension from major low of the swing (X point) always significant;
 The extension from strong thrust move is more significant than an extension from a slower move;
 It is preferable (but not absolutely necessary), that B point should be at least at the 0.382 retracement levels. Other words, AB retracement move should be easily viewed.
 The most recent expansion very often becomes important.
 “B” point should be always inside XA swing and after the “A” point in time, when you are dealing with expansions for profit taking.
Some more information we will uncover in the advanced part that is dedicated to Fib expansions.
Comments
R
robinlbird
11 years ago,
Registered user
Not sure I understand the reason to show more than one fib level on one chart, you can't tell which numbers refer to which drawing. For instance if I draw XA and then AB you can't tell which fib levels apply to the XA and which ones are for the AB. How do I know what I am looking for? The XA levels or the AB Levels....seems like we are just throwing lines out everywhere. Can't figure out what I need to focus on to make a trade.....?
Sive Morten
11 years ago,
Registered user
> Not sure I understand the reason to show more than one fib level on one chart, you can't tell which numbers refer to which drawing. For instance if I draw XA and then AB you can't tell which fib le..
Hi Robinlbird,
direction of XA swing and AB are opposite, so you can't apply the same levels to both of them.
Hi Robinlbird,
direction of XA swing and AB are opposite, so you can't apply the same levels to both of them.
M
mrVynes
11 years ago,
Registered user
This is awesome.
WaveRider
11 years ago,
Registered user
Hello Sive,
In Pesavento's "Trade What You See", he advises you enter at the D point, opposite the trend, figuring the pattern was complete and the market due for a major turn. He does the same for the "222" pattern, enter opposite the trend because the end of the pattern is a reversal signal (pg65). You seem to try to get into the pattern at C and TP at D. Why the discrepancy? I think Dinappoli does it the way you describe. Is there any merit to the counter trend entry?
In Pesavento's "Trade What You See", he advises you enter at the D point, opposite the trend, figuring the pattern was complete and the market due for a major turn. He does the same for the "222" pattern, enter opposite the trend because the end of the pattern is a reversal signal (pg65). You seem to try to get into the pattern at C and TP at D. Why the discrepancy? I think Dinappoli does it the way you describe. Is there any merit to the counter trend entry?
Sive Morten
11 years ago,
Registered user
> Hello Sive,
In Pesavento's "Trade What You See", he advises you enter at the D point, opposite the trend, figuring the pattern was complete and the market due for a major turn. He does the same for t..
Hi Wave Rider,
this calls as "Different contexts and trading systems".
Pessavento context for trading is harmonic patterns, while DiNapoli trades trend and use extensions to find entry points and targets in advance. But the context is trend. Pessavento could take profit at point, where DiNapoli will enter in opposite direction. This is just different systems, but they do not exclude each other. For example, Butterfly could appear at top of some AB=CD pattern. Personally I use them both.
In Pesavento's "Trade What You See", he advises you enter at the D point, opposite the trend, figuring the pattern was complete and the market due for a major turn. He does the same for t..
Hi Wave Rider,
this calls as "Different contexts and trading systems".
Pessavento context for trading is harmonic patterns, while DiNapoli trades trend and use extensions to find entry points and targets in advance. But the context is trend. Pessavento could take profit at point, where DiNapoli will enter in opposite direction. This is just different systems, but they do not exclude each other. For example, Butterfly could appear at top of some AB=CD pattern. Personally I use them both.
Hamza Samiullah
6 years ago,
Registered user
Good work...
Table of Contents
 Introduction
 FOREX  What is it ?
 Why FOREX?
 The structure of the FOREX market
 Trading sessions
 Where does the money come from in FOREX?
 Different types of market analysis
 Chart types
 Support and Resistance

Candlesticks – what are they?
 Part I. Candlesticks – what are they?
 Part II. How to interpret different candlesticks?
 Part III. Simple but fundamental and important patterns
 Part IV. Single Candlestick Patterns
 Part V. Double Deuce – dual candlestick patterns
 Part VI. Triple candlestick patterns
 Part VII  Summary: Japanese Candlesticks and Patterns Sheet

Mysterious Fibonacci
 Part I. Mysterious Fibonacci
 Part II. Fibonacci Retracement
 Part III. Advanced talks on Fibonacci Retracement
 Part IV. Sometimes Mr. Fibonacci could fail...really
 Part V. Combination of Fibonacci levels with other lines
 Part VI. Combination of Fibonacci levels with candle patterns
 Part VII. Fibonacci Extensions
 Part VIII. Advanced view on Fibonacci Extensions
 Part IX. Using Fibonacci for placing orders
 Part X. Fibonacci Summary

Introduction to Moving Averages
 Part I. Introduction to Moving Averages
 Part II. Simple Moving Average
 Part III. Exponential Moving Average
 Part IV. Which one is better – EMA or SMA?
 Part V. Using Moving Averages. Displaced MA
 Part VI. Trading moving averages crossover
 Part VII. Dynamic support and resistance
 Part VIII. Summary of Moving Averages

Bollinger Bands
 Part I. Bollinger Bands
 Part II. Moving Average Convergence Divergence  MACD
 Part III. Parabolic SAR  Stop And Reversal
 Part IV. Stochastic
 Part V. Relative Strength Index
 Part VI. Detrended Oscillator and Momentum Indicator
 Part VII. Average Directional Move Index – ADX
 Part VIII. Indicators: Tightening All Together
 Leading and Lagging Indicators
 Basic chart patterns
 Pivot points – description and calculation
 Elliot Wave Theory
 Intro to Harmonic Patterns
 Divergence Intro
 Harmonic Approach to Recognizing a Trend Day
 Intro to Breakouts and Fakeouts
 Again about Fundamental Analysis
 Cross Pair – What the Beast is That?
 Multiple Time Frame Intro
 Market Sentiment and COT report
 Dealing with the News
 Let's Start with Carry
 Let’s Meet with Dollar Index
 Intermarket Analysis  Commodities
 Trading Plan Framework – Common Thoughts
 A Bit More About Personality
 Mechanical Trading System Intro
 Tracking Your Performance
 Risk Management Framework
 A Bit More About Leverage
 Why Do We Need StopLoss Orders?
 Scaling of Position
 Intramarket Correlations
 Some Talk About Brokers
 Forex Scam  Money Managers
 Graduation!