**Ok, here is one of your favorite “Brain cracking” parts of Forex Military School – “Advanced talks”. Today is about Fib expansions or extensions – call them, as you wish. For purposes of this lesson let’s mark extension with “A-B-C-D” letters, so that AB is the initial swing, BC-the retracement, CD –the expansion move.**

Commander in Pips:Commander in Pips:

**Ok, I hope I can survive after that…**

*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:***Come on, don’t put yourself down. I even made colored charts, so it will be not so boring. We will discover some very useful things, and they will give you much advantage compared to other traders. Because, as we already know –the smaller the nuance the more important it is. So let’s start. We will build the current lesson in points and will give explanations and examples. Of course we can’t cover all details and nuances here, so I suggest that you ask more questions in this forum.**

*Commander in Pips:***Here our task is just to point out important details.**

*Commander in Pips:*Previously we’ve said that we will use retracement levels to open positions and extensions to exit from them, i.e. take profits. But also, you can use Fib retracement levels of higher time frames as profit objective points, because, as we’ve noted earlier – the higher the time frame, the stronger the level. Especially this rule is important for Confluences of higher time frames.

**1. You may use Fib Retracement levels as profit taking objectives, but of higher time frames.**Say, if you’ve entered short on daily time frame, then you may use as a target for profit taking Fib support from a previous swing up on weekly time frame. If this will be weekly Confluence support – much better. The same is true for any time frame pairs and down swings as well – weekly-monthly; daily-weekly; hourly-daily, 5-min-hourly - look at chart #1.

*Chart #1 EUR/USD Weekly*

**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:***2.**

**If some (down) Fib extension level coincides with opposite Fib retracement (supports from up move) – this fact creates an area of coincidence, that DiNapoli calls “Agreement” and this area is stronger than just a single Fib level. Also, a single area could be an Agreement and Confluence area simultaneously:**

**Chart #2 GBP/USD Weekly**– here you can see retracement from an up move and extension from down move coincide in relatively tight range – this is Agreement.

**3. The example above on chart #2 could let you understand - was some particular Fib retracement level been broken already or not. On the chart we clearly see, that the 0.618 Fib extension target from the ABC down move is slightly below that weekly confluence support. It tells us, that although Confluence support was penetrated and that the market has even shown a single close below it – this Confluence support is still valid, because market just accomplished 0.618 target – that’s all. Here is the rule:**

If you see, that market stands a bit lower that Fib retracement level, you should drop your time frame and find out – is any ABC patterns has a target (any of them 0.618, 1.0 or 1.618) that is lightly lower or higher (depending on direction) than this level. If it does, then, possibly retracement level is still valid – the market just accomplishes an ABC target.

But, if the market suddenly continues its move down – lower than the area of Agreement, then this level probably has been broken.

4. If market accelerates after C point directly from 0.618 to 1.0 or even to 1.272, i.e. passes 0.618 target without any respect – then there is a solid probability that it could reach 1.618 expansion;

5. The shallower the BC retracement, the greater the probability that the market will reach the 1.272 or even the 1.618 Fib expansion – usually it should not be deeper than 0.5 for that purpose;

6. If the CD leg is faster than AB, then probably the market could reach 1.272 or 1.618 expansion;

7. If market shows strong long bars or even gaps near 0.618 or 1.0 extension targets in the direction of extension – the more probable it is that it will continue it’s move to 1.272 or 1.618;

8. If retracement on BC leg is 0.786 or deeper, then probably market will not move farther than 1.0 extension target.

9. If AB and CD legs are very harmonic and symmetrical, then there is a solid probability that in 1.0 extension target (D point) we will meet solid resistance/support or even reversal;

10. If the market is really strong, it should not show deep retracement after reaching of 0.618 Fib extension target.

If you see, that market stands a bit lower that Fib retracement level, you should drop your time frame and find out – is any ABC patterns has a target (any of them 0.618, 1.0 or 1.618) that is lightly lower or higher (depending on direction) than this level. If it does, then, possibly retracement level is still valid – the market just accomplishes an ABC target.

But, if the market suddenly continues its move down – lower than the area of Agreement, then this level probably has been broken.

4. If market accelerates after C point directly from 0.618 to 1.0 or even to 1.272, i.e. passes 0.618 target without any respect – then there is a solid probability that it could reach 1.618 expansion;

5. The shallower the BC retracement, the greater the probability that the market will reach the 1.272 or even the 1.618 Fib expansion – usually it should not be deeper than 0.5 for that purpose;

6. If the CD leg is faster than AB, then probably the market could reach 1.272 or 1.618 expansion;

7. If market shows strong long bars or even gaps near 0.618 or 1.0 extension targets in the direction of extension – the more probable it is that it will continue it’s move to 1.272 or 1.618;

8. If retracement on BC leg is 0.786 or deeper, then probably market will not move farther than 1.0 extension target.

9. If AB and CD legs are very harmonic and symmetrical, then there is a solid probability that in 1.0 extension target (D point) we will meet solid resistance/support or even reversal;

10. If the market is really strong, it should not show deep retracement after reaching of 0.618 Fib extension target.

Ok, I think this is enough for beginning. Now let’s take a look at different extensions that could be used in the same swings. Draw extensions for me here:

*Chart #3 GBP/USD Weekly*

**Well, it’s not so difficult. I think it will be like that:**

*Pipruit:*

*Chart #4 GBP/USD Weekly*

**Well, that’s right. But why not like that:**

*Commander in Pips:*

*Chart #5 GBP/USD Weekly*

**Here you can see, by the way, application of our 9th rule – AB and CD legs are harmonic. See, market has touched 1.0 Fib extension almost pips to pips on weekly time frame (!) and formed bearish engulfing pattern.**

*Commander in Pips:***Yes, that’s impressive.**

*Pipruit:*

**Or, may be we should marked them like here:**

*Commander in Pips:*

*Chart #6 GBP/USD Weekly*

**Commander, I do not know, you confuse me. Which one is valid?**

*Pipruit:***In fact, all of them are valid. He-he-he…**

*Commander in Pips:***That’s not funny. And which one we should trade, how to choose the most important?**

*Pipruit:*

**And those are reasonable questions, son. Let’s point some rules, how to deal with Fib extensions. They are not exhausted, but all that I will tell should be enough for beginning. When you get more experience – you will learn better and better to deal with them.**

*Commander in Pips:*1.

**You always have to start from higher time frame extensions**(monthly quarterly), just to be sure that they are not going to have impact on your potential trade. Because it may happen that even trading on hourly chart, the market can reach some monthly extension target and you will see support or resistance there, where you absolutely do not expect to see it. It would cost you a lot of money and heartache.

**Actually this rule must be applied not only to extensions but to overall market analysis – always start from higher time frame, to understand where you are in a big picture;**

2. Try to recognize, where the thrust is (AB move) and where a retracement from these thrust is (BC move). Then you easily can estimate whole extension;

3. “C” point should always stand inside AB swing. And, it always is the lowest/highest point, from which up/down extension move (CD) has started in continuation of initial AB swing;

4. It is better, if the BC move is well recognizable and reaches at least 0.382 retracement level from AB swing. But sometimes could happen that the B point and C point will be the two nearest candles;

5. As a rule, the latest extension is important (as on chart #5) and the major extension (as on your chart #4);

*Chart #4 GBP/USD Weekly*

*Chart #5 GBP/USD Weekly*6. If you have many different extensions – as we are on this GBP/USD weekly chart, you should apply those that are suitable to your potential position. Let’s assume that you’ve bought in C point at 1.5335. Using the most recent extension (chart 5) is more reliable, than those that on chart 4 or 6. Because they are forming during much longer time, hence to hit their targets it’s also a lot of time will needed. But extension on chart #5 has 1.0 target much closer. Besides, even if you have chosen extension from chart #4 or #6 and intend to hold position for a long time, you should keep in mind that extension on chart #5 will show you strong resistance or even reversal. May be better to exit and then reenter on some retracement?

7. Much better if AB is thrust move, than some sideway almost flat move.

And the last one for today – as retracement levels could be used as profit objectives, as extensions could be used for estimation areas of support and resistance. Only for that purposes it allows that “C” point” stands slightly outside AB swing. Here is how it looks like:

*Chart #7 GBP/USD Weekly*

*Chart #7 GBP/USD Weekly*

1. First, here you can see an importance of major AB swing – look how the market reacts on all targets – 1.0; 1.272 and 1.618. Furthermore – 1.618 target with outstanding accuracy shows the reverse on top. This top is also has been confirmed by shooting star that later has become a part of evening star pattern;

2.

**Pay attention to the moment, how we have chosen an “A” point.**This is not a swing low at 1.7046, but this is the point, from which thrust itself has started directly. This is very important – you should always use this kind of points as “A” point;

3. Here you can see, how Fib extension tool could be applied for estimation of support area. See the last ABC pattern – C point stands a bit outside of AB swing. And 1.618 extension target supports the market. This is an Agreement by the way with 0.382 Fib retracement (support) level!

And here what could happen, if we use as “A” point the swing low at 1.7046:

*Chart #8 GBP/USD Weekly*

**See, how such small nuance as choosing a start point of extension building could lead to serious problems. Just imagine if you hold Long position somewhere around 2.050 area and you’ve chosen “A” point as on chart #8. So, you are quite happy and intend to take a profit around 2.1342 area – 1.618 Extension target. Suddenly, market reverses down and you have a big problem, mostly because you do not understand what is happening – is it just retracement or what? And the major question is “why”. And the reason is just is in “A” point choosing…**

*Commander in Pips:***Commander, I even have no words currently. Here is a lot of important information, and I suppose that I will have to return to this part and read it again and again. But I have to remember that.**

*Pipruit:***This is wise decision, son. This material will help you much in real trading.**

*Commander in Pips:*
Hello Mr. Morten!

Very tradable information in this chapter. Although, I find it difficult to apply on pairs that go just one direction, like USDCHF for example. So, here is the question:

Fib expansions work the same way as the retracements? And do they form Agreement areas with Fib expansions targets? To see what I mean I attach a chart. Is it the blue area an Agreement?

Thank you!