Fibonacci Extensions are an important tool used in technical analysis, commonly used to predict potential areas of support and resistance in the future price movements of assets. These extensions are based on the Fibonacci sequence, a series of numbers where each number is the sum of the two preceding ones.
Fibonacci Extensions help traders to identify potential price targets or the end of a particular trend. They extend beyond the 100% level of a price move and are often drawn along with Fibonacci retracements, which help identify potential reversal levels.
The most common Fibonacci Extension levels are 138.2%, 161.8%, 200%, and 261.8%. For example, if a stock price rallied from ₹10 to ₹20, then pulled back to ₹15, a trader could use Fibonacci Extension levels to estimate where the price might go once it starts moving again.
Traders plot these extensions on a chart by taking two extreme points – a major peak and trough – and dividing the vertical distance by key Fibonacci ratios. Remember, these are predictive tools, not guarantees. Thus, they should be used with other forms of analysis to increase their accuracy.
