Fibonacci Expansions are price levels created by tracing the primary move (sometime called the impulse move) and its retracement.
The resulting levels are drawn on the chart in an area that would normally be difficult to estimate support and resistance using ordinary charting tools.
This makes Fibonacci Expansion especially useful for picking profit targets when trading trends.
When faced with an upward trending stock or currency pair, there are going to be times when price moves counter to the overall trend. Once this counter move or retracement is exhausted, price resumes back in the direction of the primary trend and will often break new highs.
It is at that moment, that Fibonacci Expansion tool can be used.
While the Fibonacci Retracements are used to determine how far the price might originally retrace, Fibonacci Expansions can help us determine where price might head after the retracement is exhausted
Highlighted below are a primary move followed by a retracement move.
You simply need to plot three points using the expansion tool
- The beginning of the primary move - the low.
- The end of the primary move - the high.
- The retracement - the swing low.
All these lines can be interpreted as resistance levels as the price moves higher, making them perfect areas to place profit targets.
You can see in this example that price quickly hit the 1st profit target before consolidating, and then later broke upwards towards the 2nd profit target before retracing lower. It hit each of these prices, bang on! Before price regrouped for its next move.
This gave us some nice exits for this recent trade closing out at the 1.618 level (I’m only closing this here as there is a high sloping resistance line on the long term daily chart that will be very hard for price to penetrate)
You could use these to scale out of trades using multiple targets this is a pretty good money management strategy which lets you to lock in profits as the position moves in your favour. This should help smooth out your overall returns (and emotions) on a trade by trade basis.
- Fibonacci Expansions used to find potential levels of support and resistance biased on previous price action.
- They are created by tracking impulse (or primary) moves and their subsequent retracements.
- Can be used to set multiple profit target for your trades.