**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.**

Commander in Pips:Commander in Pips:

**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?**

*Pipruit:*

**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.**

*Commander in Pips:***And why do we need that?**

*Pipruit:***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.**

*Commander in Pips:***Cool! So, in a simple approach (without your brain cracking advanced parts) we use Fib retracement for entering and Fib extensions for exiting, right?**

*Pipruit:***In a simple approach – yes. Ok let’s start with that and use a 4-hour 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:**

*Commander in Pips:*

*Chart#1 EUR/USD 4-hour chart*

**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.**

*Pipruit:***This sounds logical. Let’s see, where you’ve entered:**

*Commander in Pips:*

*Chart#2 EUR/USD 4-hour chart*

**And where?**

*Pipruit:***Now let’s remember the ratios for Fib extensions – we’ve studied them in the first part of current chapter.**

*Commander in Pips:***Ok, just one second, Sir, I remember – 0.618; 1.0; 1.272; 1.618; 2.0; 2.618.**

*Pipruit:***Brilliant. Now let’s see how we could apply them here. The major idea here is as follows:**

*Commander in Pips:*- 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 three-click 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 4-hour chart*

**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)?**

*Pipruit:***To better understand it, let’s look at formula for their calculation:**

*Commander in Pips:*****

Extension = (A-X)*ratio + B

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.

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

*Pipruit:*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.

**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:***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.**

*Pipruit:***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:**

*Commander in Pips:*

*Chart#4 EUR/USD 4-hour chart*

**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?**

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

*Commander in Pips:***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!**

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

*Pipruit:***Ok, now, let’s take a look at a down thrust. But here I want you to mark Fib retracement and expansions.**

*Commander in Pips:***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 three-click 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.

**Ok, I’ll try.**

*Pipruit:***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:**

*Commander in Pips:*

*Chart#5 EUR/USD 4-hour chart*

**Ok, here are the Fib retracement levels:**

*Pipruit:*

*Chart#6 EUR/USD 4-hour chart*

**And when I am sure that we’ve got our “B” point – the highest point of retracement up - we draw expansions:**

*Pipruit:*

*Chart#7 EUR/USD 4-hour chart*

**Commander, I’m stunned again – the market has turned up precisely at the 1.0 extension level.**

*Pipruit:***You did all things correctly. But here some important notifications to Fibonacci extensions:**

*Commander in Pips:*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.