Trend-Based Fib Extensions use Fibonacci Ratios to predict future prices. Such ratios are observable throughout much of nature. It is often speculated that they may also be present in the price cycles of exchange-traded assets.
Whether one believes this or not, most traders now acknowledge that the popular use of Fibonacci ratios in individual and algorithmic trading strategies has given the ratios an almost self-fulfilling predictive merit.
In order to use this tool, all a trader needs are three points on a chart:
- The start of a move
- The end of a move
- The end of a retracement against that move
Using these three points, a trader can plot a Trend-Based Fib Extension to determine profit targets or points of resistance.
How To Plot A Trend-Based Fib Extension
Step 1: Load up a chart on the BTSE platform
Step 2: Click “Gann and Fibonacci Tools” in the left toolbar
Step 3: Select “Trend-Based Fib Extension” from the drop-down menu
Step 4: Click the mouse three times at the following points
- First, click on the low from which a move started
- Then click on the high where that move ended
- Then click on the end of the retracement of that move
Step 5: Extend the Fib Extension horizontally, ensuring that the 0 line stays on point #3.
Step 6: Expand Y-axis range to see higher Fib Extensions
How To Use Trend-Based Fib Extensions
- Traders might use the various extension levels as an objective way to set profit targets.
- Profit-taking can also be staggered with sell orders spread across many fib extensions.
- Counter-trend traders might choose to use the extensions as resistance points from which to enter short positions.
Limitations Of Trend-Based Fib Extensions
- This is a predictive indicator that assumes the market will exhibit cycles that accord with the Fibonacci ratio. This assumption may not be true.
- Traders using this indicator to predict future prices should expect false signals and plan for them accordingly with strict risk management practices.
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