Indices Trading Fib Expansion Levels
We have looked at Fibonacci retracement in the previous course, drawn between 2 points. But to draw Fibonacci expansion we use Three chart points.
To draw these levels we wait until the retracement is complete and indices trading price starts to move in original direction of the trend. Where the retracement reaches is used as point 3.
The example explained and 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 displayed on the stock indices trading examples explained below.
Please note where these levels are drawn - they are drawn above the indicator, these are the points where the trader will place the take-profit orders.
Drawing Expansion Levels on an Upward Trend
We use Fibonacci extension levels to estimate where the movement will reach. There are 2 important extension levels: 61.8% and 100 %, these are used for taking profit.
On the examples, below you can see that the Fib extension is drawn along the direction of the trend, since the trend is upwards - the expansion is drawn upward.
These areas are displayed as horizontal lines above the technical indicator, showing the profit taking areas. In the stock indices example explained and 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 Fibonacci expansion 100% to set take profit. Now find a Indices 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 index trading price retraced again after getting to the 100.00% extension.
Drawing Expansion Areas on a Downwards Trend
Since we use this tool to estimate take profits, how do we draw it in a downwards Indices trend?
We draw it from point 1 to 2 to 3 as displayed below. Remember we always draw this tool in direction of the trend. In the stock indices trading example explained and 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 and how it is drawn below. This time you would also have used extension level 100 %, see just where the index trading price reached. That would have been a nice take profit area.
From the stock indices example above, after plotting this tool there are 2 levels that are used to show the profit taking areas, these two are drawn as horizontal lines across the index trading price chart.
