Stock Indices Trading Fibo Expansion Levels

We have looked at Fibonacci retracement in the previous course, drawn between 2 points. But to draw Fibonacci expansion we use 3 chart points.

To draw these levels we wait until the retracement is complete and the stock indices instrument starts to move in the original direction of the trend. Where the retracement reaches is used as point 3.

The example illustrated below shows the 3 Points where the Fibonacci extension is drawn, marked as 1, 2 and 3. 1 is where the trend started, 2 is where the trend pulled back & retraced and 3 is where the retracement reached as portrayed on the example illustrated below.

Please note where these levels are drawn - they are drawn above the indicator, these are the points where the trader will place the takeprofit orders.

Drawing Expansion Levels on an Upward Trend

We use Fibonacci extension levels to estimate where the movement will reach. There are two important extension levels: 61.80% and 100 %, these are used for taking profit.

On the examples, below you can see that the Fibonacci extension is drawn along the direction of the trend, since the trend is upwards - the expansion is drawn upward.

These levels are displayed as horizontal lines above the technical indicator, showing the profit taking areas. In the example illustrated below if you had used of 100 % extension you would have made nice profit from the trade.

NB: This is the same trade from the previous example where we used Fibonacci retracement to buy at around retracement level 38.2 %. At the same time we have used Fibo expansion 100% to set take profit. Now find a chart & practice these strategies.

From the above examples, the upward trend continued and both 61.8 % and 100.0 % levels were all hit after which stock price retraced again after getting to the 100.00% extension.

Drawing Expansion Levels on a Downward Trend

Since we use this tool to estimate take profits, how do we draw it in a downwards trend?

We draw it from point 1 to 2 to 3 as shown below. Remember we always draw this tool in the direction of the trend. In the example illustrated below, can you figure what direction we have drawn it? That is right - downwards.

Try and see the difference between how we have drawn it above & how it is drawn below. This time you'd also have used extension level 100%, see just where the price reached. That would have been a nice take profit area.

From the example above, after drawing this tool there are two levels that are used to show the profit taking areas, these two are drawn as horizontal lines across the stock price chart.