Fibonacci Extensions Definition
Fibonacci levels are a standard measure for support and resistance levels within the market. This levels are calculated by analyzing the retracement levels between two swing points. The next question we have to ask ourselves as traders, is what happens when price exceeds the very swing points we use to calculate our fibonacci levels? At what point do we look to exit our position? The key to these questions are fibonacci extensions. Fibonacci extensions provide price targets that go beyond a 100% retracement of a prior move. The levels for fibonacci extensions are calculated by taking the standard fibonacci levels and adding them to 100%. Therefore, the standard fibonacci extension levels are as follows: 138.2%, 150%, 161.8%, 231.8%, 261.8%, 361.8% and 423.6%.
Identifying Fibonacci Extension Levels
The first step in drawing fibonacci extension levels is to identify two clear swing points. These point should be in relation to both your current timeframe and length of trend. In the below example we will be reviewing the fibonacci extension levels for Provident Bankshares (PBKS). As you can see, the stock was able to exceed its high of $18.76. Once PBKS exceeded this prior swing high, the stock began an impulsive move up that would not face any real resistance until achieving its 261.8% retracement level.
Trading at Fibonacci Extensions
The last part of the fibonacci extension equation, is what to do when the asset hits the respective target. The first inclination is to immediately close your position at the next fibonacci level. Traders will have to fight this urge and wait to see how the stock reacts at these fibonacci extensions. Remember, the stock has exceeded previous swing highs and could very well start an impulsive move.