In this article we will discuss two very popular Fibonacci tools: Fibonacci retracement and extension.
1οΈβ£Fib.Retracement tool is applied to identify a completion point of a retracement leg within an impulse.
As you know price action has a zig-zag form.
For example, in a bullish trend, the price tends to set a higher high then retrace and set a higher low before going to the next highs. In a bearish trend, the price tends to set a lower low and retrace to a lower high.
With retracement levels, we are trying to spot the point from where the next impulse in a bullish or bearish trend will initiate based on the last impulse leg.
Fib.levels that we will apply are: βοΈ0.382 βοΈ0.5 βοΈ0.618 βοΈ0.786
The retracement levels will be drawn based on XA impulse leg. From its low to high if the impulse is bullish and from its high to low if the impulse is bearish.
From one of the above-mentioned levels, a trend-following movement will be expected.
One should apply different techniques to confirm the strength of one of these levels.
2οΈβ£Fib.Extension tool is applied to identify a completion point of the impulse. In a bearish trend, the extension levels will indicate a potential level of the next lower low based on the length of the last bearish impulse.
Fib.levels that we will apply are: βοΈ1.272 βοΈ1.414 βοΈ1.618
The extension levels will be drawn based on XA impulse leg. From its low to high if the impulse is bullish and from its high to low if the impulse is bearish.
From one of the above-mentioned levels, a retracement leg will initiate.
One should apply different techniques to confirm the strength of one of these levels.
Of course other ways of application Fib.Retracement and Extension levels exist. However, these two are the most common.
How do you use these levels?
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