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New short horror story: “As she used Fibonacci extensions for trading decisions, she noticed a strange sequence appearing: 1, 1, 2, 3, 5, 8…but when she reached the 13th extension, she heard a ghostly voice whisper ‘Sell everything now’.”

Article:

Using Fibonacci Extensions for Better Trading Decisions

Fibonacci extensions are a popular tool used by traders to predict future price movements. It is based on the Fibonacci sequence, where each number is the sum of the two preceding numbers: 0, 1, 1, 2, 3, 5, 8, 13, 21…and so on. This sequence has been found to appear in various organic and inorganic structures, including financial markets.

In trading, Fibonacci extensions are used to determine potential price targets for a stock or other financial instrument. By using Fibonacci ratios such as 0.618, 1.618, and 2.618, traders can identify possible areas of support and resistance. These levels are based on the assumption that markets tend to move in waves, with retracements and extensions occurring at certain ratios.

For example, if a stock has just made a significant move upwards, a trader may use Fibonacci extensions to determine potential levels where the stock might encounter resistance. The trader would simply draw a Fibonacci retracement tool on the chart, starting at the lowest point of the move and ending at the highest point. Then, using the Fibonacci ratios, the trader would project levels where the stock might reverse or consolidate.

Here is an example of Fibonacci extensions being used on a chart of Apple’s stock (AAPL):

(Image source: TradingView)

In this example, the trader has drawn a Fibonacci retracement tool from the low point in mid-March to the high point in mid-June. The levels where the retracement lines intersect with the upward trend line are potential areas of support. The trader has also added Fibonacci extensions to the chart, projecting potential price targets based on the ratios of 1.618 and 2.618.

As you can see from this chart, Apple’s stock did encounter resistance at the 1.618 extension level and consolidated for a period of time. It then broke through that level and continued upwards, eventually reaching the 2.618 extension level before encountering resistance again.

While Fibonacci extensions can be a valuable tool for traders, they should not be used in isolation. They should be used in conjunction with other technical analysis tools such as trend lines, moving averages, and oscillators. It is also important to consider fundamental factors such as earnings reports, industry trends, and economic news.

FAQs

Q: What is the Fibonacci sequence and why is it useful in trading?
A: The Fibonacci sequence is a mathematical sequence where each number is the sum of the two preceding numbers. In trading, it is useful because it tends to appear in market movements and can be used to predict potential areas of support and resistance.

Q: How do I use Fibonacci extensions?
A: To use Fibonacci extensions, you need to draw a Fibonacci retracement tool on a chart of a financial instrument. This tool should be drawn from the lowest low to the highest high of a certain period. Then, using the Fibonacci ratios of 0.618, 1.618, and 2.618, you can project potential areas of support and resistance.

Q: Can Fibonacci extensions predict the future?
A: No, Fibonacci extensions cannot predict the future with complete accuracy. They are simply a tool that can help traders identify potential price targets and areas of support and resistance. It is important to use them in conjunction with other technical and fundamental analysis tools.

Q: Are Fibonacci extensions reliable?
A: Fibonacci extensions can be reliable in certain market conditions, but they should not be relied on in isolation. It is important to use them in conjunction with other analysis tools and to consider fundamental factors as well.

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Ihab Salloum