How to Apply Fibonacci Extension Tool in Trading

Introduction

Fibonacci extension tool is a populartechnical analysistool used by traders to identifypotential price targetsin the financial market. This tool is based on the Fibonacci sequence, which is a mathematical concept that is widely used in trading. In this article, we will discuss how to apply the Fibonacci extension tool in trading.

What is the Fibonacci Extension Tool?

The Fibonacci extension tool is a technical analysis tool that is used to identify potential price targets in the financial market. It is based on the Fibonacci sequence, which is a mathematical concept that is widely used in trading. The Fibonacci sequence is a series of numbers where each number is the sum of the two preceding numbers. The sequence starts with 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, and so on.

How to Apply Fibonacci Extension Tool in Trading

To apply the Fibonacci extension tool in trading, follow these steps:

Step 1: Identify the Trend

The first step is to identify the trend. This can be done by analyzing the price chart and looking for higher highs and higher lows in an uptrend or lower lows and lower highs in a downtrend.

Step 2: Identify the Swing Points

The next step is to identify the swing points. These are the points where the price changes direction. In an uptrend, the swing points are the low points, and in a downtrend, the swing points are the high points.

Step 3: Draw the Fibonacci Retracement Tool

The third step is to draw the Fibonacci retracement tool. This tool is used to identify the potential retracement levels of the price. It is drawn by connecting the swing points with a horizontal line and then drawing vertical lines at the Fibonacci levels of 23.6%, 38.2%, 50%, 61.8%, and 100%.

Step 4: Identify the Potential Price Targets

The fourth step is to identify the potential price targets using the Fibonacci extension tool. This tool is used to identify the potential extension levels of the price. It is drawn by connecting the swing points with a horizontal line and then drawing vertical lines at the Fibonacci levels of 161.8%, 261.8%, and 423.6%.

Step 5: Place Your Trades

The final step is to place your trades based on the potential price targets identified by the Fibonacci extension tool. You can use this tool to set your profit targets or to identify potential levels where you can enter a trade.

Conclusion

The Fibonacci extension tool is a powerful technical analysis tool that can help traders identify potential price targets in the financial market. By following the steps outlined in this article, you can learn how to apply this tool in yourtrading strategy. Remember to always userisk managementtechniques and to never risk more than you can afford to lose.