Fibonacci Extension Profit Taking Trading Forex

The Fibonacci Sequence and Fibonacci Extension

The Fibonacci sequence is a series of numbers where each number (except the first two) is the sum of the two preceding ones. This simple sequence has been found to occur in many natural phenomena, including the growth of plants and the patterns of waves. Fibonacci extensions are a set of horizontal lines drawn on a price chart based on the Fibonacci sequence. These lines are used by traders to identify potential areas of support, resistance, and profit taking.

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The Fibonacci extensions are calculated by taking the Fibonacci ratios of key swing points in the market. The most common Fibonacci ratios used are 23.6%, 38.2%, 50%, 61.8% and 100%. Fibonacci retracements were developed by Bill Williams and have gained traction since being featured in his book, Trading Chaos.

Fibonacci Extension Profit Taking

Fibonacci extensions can be used to identify potential areas of profit taking. When a market is in an uptrend, a Fibonacci extension can be drawn from the low of the most recent swing low to the high of the most recent swing high and extended above that level. Fibonacci extension levels can signal possible exit areas where you can profit off of your previous winning trade.

For example, if a stock is trading at $100 and has a Fibonacci extension drawn from $90 to $110, the stock may be considered overbought if it reaches the 61.8% Fibonacci extension level at $106.18. At this point, traders who are long the stock could consider taking profits.

As you can see in the example above, marked with a blue box is a bearish engulfing pattern. In the context of trading, this can be a sign of a trend reversal from bullish to bearish. If you are holding a position that coincides with the 61.8% Fibonacci extension level, this could also be used as confirmation that it may be time to take profits off the table.

Tips and Expert Advice

Here are a few tips for using Fibonacci extensions for profit taking:

• Never use Fibonacci extensions in isolation. Fibonacci extensions should be used in conjunction with other technical analysis tools, such as support and resistance levels, moving averages, and candlestick patterns.
• Manage your risk wisely. When trading using Fibonacci extensions, it is important to set stop-loss orders to protect your profits.
• Avoid overtrading. It can be tempting to trade too much when using Fibonacci extensions. However, it is important to be patient and only trade when there is a clear signal.

By following these tips, you can increase your probability of success when using Fibonacci extensions for profit taking.

FAQ

Q: How are Fibonacci extensions calculated?
A: Fibonacci extensions are calculated by taking the Fibonacci ratios of key swing points in the market. The most common Fibonacci ratios used are 23.6%, 38.2%, 50%, 61.8% and 100%.

Q: What are the different ways to use Fibonacci extensions?
A: Fibonacci extensions can be used to identify potential areas of support, resistance, and profit taking. They can also be used to measure the extent of a retracement.

Q: Are Fibonacci extensions a reliable trading tool?
A: Fibonacci extensions can be a valuable trading tool, but they should not be used in isolation. They should be used in conjunction with other technical analysis tools, such as support and resistance levels, moving averages, and candlestick patterns.

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Fibonacci Extension Profit Taking Trading Forex

Conclusion

Fibonacci extensions are a useful tool that can be used to identify potential areas of profit taking. However, it is important to remember that Fibonacci extensions are not a magic formula. They should be used in conjunction with other technical analysis tools and risk management strategies.

Are you interested in learning more about Fibonacci extensions? If so, there are a number of resources available online. You can also speak to a financial advisor to get personalized advice.