# Fibonacci Extension Levels

## Technical Analysis Projection Techniques

Fibonacci Extension Levels - Learn how to use, calculate and draw Fibonacci technical analysis projection and expansion lines. In this tutorial, you'll learn a system for taking day trading profits based on the fibonacci ratio .618.
On the day trading system (EXITs) page I discussed letting winners run through the use of profit targets and objectives.

I also went over several different
trailing stop methods that can be used as exits.

Here, I want to discuss another technique for setting profit targets and objectives using the fibonacci tool that comes with most stock charting software.

### YOU'RE IN, NOW WHERE'S YOUR PROFIT TARGETS?

The best way to explain this fibonacci application of technical analysis is with an example. Lets say you just got long in SPY on a Strategy #4 breakout. If you want to know what a Strategy #4 breakout is, you'll find that on my share trading strategies page.

You have your stop in place and now you want to use fibonacci extension levels to determine where to place your profit target
or targets, if you'd rather not get out all at one time.

So, take a look at the following 10 minute chart of SPY. This is where the example trade is so far.

### USING FIBONACCI FOR PRICE PROJECTION

Price projection is based on the basic 1 - 2 - 3 price movement that all stocks under go. This 1 - 2 - 3 movement is of course, specific to each time frame. For each move up, there is a retracement and then another move up.

It's this 2nd move up, that we are trying to the determine the distance on -- how far is price going to go?

We use the fibonacci ratio .618 to try to give us the answer. There are three numbers that are typically used for projections: .618, 1.00, and 1.618, where 1.00 is simply a measured move of price, exactly equal to the first move, and 1.618 is just the reciprocal of .618.

The diagram below shows the relation of fibonacci extension levels to the first price movement, after the retracement.

To get the first target, just take the price movement X and multiply by .618, then measure it from the retracement.

The second target is the same as X.

The get the third target, multiply the same number X, by 1.618

The diagram below is much easier to understand, if I've confused you.

But, rather than calculating fibonacci levels, it's easier to just use your charting software's fibonacci grid tool for this method. First, you drag the fib tool from the high of the price move down to the low.

But, now you're looking at the 10 min. chart above, and probably thinking, "Which high and low do I use?" This is where most explanations on the web and in books leave you hanging.

And my answer is to use the fibonacci price projection method, you usually have to use a higher time frame to base your projection from, because the projections off this 10 min, chart for example, won't give you a high enough profit objective. In other words, the profit target won't be a large enough multiple of your stop.

So what do you do? My suggestion is to use a time frame in which there is a clear 1 - 2 - 3 movement in price to measure the fib levels from. And one which can give you a reasonable target to complete on an intraday trade.

If you take our example with SPY and zoom out to an hourly chart like I have below, you'll see the basic 1 - 2 - 3 price movement drawn in yellow. The arrows point to where you should place the fibonacci grid tool. You would drag the tool from the top arrow to the bottom arrow.

Done.

Now, you pick up and place that measured grid so that the zero line is at the bottom of the retracement, as on the chart below. This display the .618 and the 1.00 targets. The 1.618 fibonacci extension level would be above that price level, out of view.

You can see that SPY reached the 1.00 fib price projection (highlighted in yellow) and then sold off a bit after hitting it.

And here's what SPY looked like on the 10 min. chart.

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