No need to look further: Fibonacci Extension and shortcut trading techniques

Many people think that Fibonacci is just a drawing tool to create a sense of order, but in reality, it helps us trade more intelligently because it is a hidden proportion in nature. Whether in seashells, leaves, or even in the movement patterns of stock prices, this article will explore what Fibonacci extension is and how to use it effectively for trading.

Origin and Mechanics of Fibonacci You Need to Know

The Sacred Number in Nature

Fibonacci is a series of numbers with special rules: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144… Each number is the sum of the two preceding numbers. Indian scientists discovered this pattern between 400-200 BC, and over 1,500 years later, Europeans studied and named it after the mathematician Fibonacci.

What’s special is that when we divide numbers in the sequence, the resulting ratios are constant, such as:

• 34 ÷ 55 = 0.618 (called Golden Ratio)
• 55 ÷ 34 = 1.618
• 610 ÷ 1597 = 0.382

These proportions appear in art, architecture, and even in the human body. Their components are used in design because these ratios look beautiful and natural to the eye.

Fibonacci Extension: A Magical Tool for Price Targeting

Differences Between Various Fibonacci Tools

Before diving into what Fibonacci extension is, it’s important to understand that Fibonacci has several forms:

Fibonacci Retracement - Used to find reversal points during a correction (levels 0%, 23.6%, 38.2%, 50%, 61.8%, 100%)

Fibonacci Extension - A tool for predicting the extension of price after a breakout. When price breaks resistance/support, levels are at 113.6%, 127.2%, 141.4%, 161.8%, 200%, 261.8%.

Fibonacci Projection - Combines Retracement and Extension to see both pullback points and extension targets simultaneously.

Fibonacci Timezone - Used on the time axis (x-axis) to help predict significant timing changes.

Fibonacci Fans - Sloped lines combining price (y) and time (x) in one tool.

How to Use Fibonacci Extension in Real Situations

Fibonacci Extension is used when you want to know how far the price might go after breaking out.

Steps to use:

1. Identify the Swing High (peak) and Swing Low (trough) of the main trend.
2. Connect these two points with a line from left to right.
3. The tool will generate horizontal channels at levels 113.6%, 127.2%, 141.4%, 161.8%, 200%.
4. When the price breaks out, it tends to stop near one of these levels.

Multi-Dimensional Trading Strategies: Fibonacci + Other Tools

Fibonacci + EMA: Trend detection and entry points

EMA (Exponential Moving Average) is a weighted average that emphasizes recent prices to identify the main trend.

How to combine:

• Use EMA to determine if the trend is bullish or bearish (price above or below EMA line)
• Use Fibonacci Retracement to set support/resistance levels at 23.6%, 38.2%, 50%
• Enter buy/sell when price approaches these levels without closing beyond the EMA

Real example: On AUD/USD on a 15-minute chart, if the price is below EMA(50), indicating a downtrend, draw Fibonacci Retracement and wait for the price to bounce back to test 0.236, 0.382 levels. When a reversal candle pattern appears, you can open a short position.

Fibonacci + RSI: Confirm momentum strength

RSI (Relative Strength Index) indicates whether the price is overbought (Overbought) or oversold (Oversold), and most importantly, signals when RSI Divergence occurs (price makes a new high but RSI does not), signaling potential weakness.

How to combine:

• Use Fibonacci Extension to find target levels (113.6%, 161.8%, 200%)
• Observe RSI: if the price hits the target but RSI shows divergence, it’s a warning sign
• Close part of the position or take profit in that zone

Real example: AUD/JPY in an uptrend, draw Fibonacci Extension at 161.8%. When the price approaches this level, if RSI starts to decline or shows Bearish Divergence, it’s time to be cautious of a pullback.

Fibonacci + Price Action: Confirmation with candlestick patterns

Price Action refers to candlestick formations indicating buying/selling pressure, such as Doji, Engulfing, Pin Bar.

How to combine:

1. Draw Fibonacci Retracement to identify support/resistance.
2. Wait for the price to approach these levels and see if a reversal candlestick pattern appears (e.g., Doji at resistance = warning of a reversal)
3. Confirm the support/resistance is strong when multiple patterns align.

Effective Trading Structures in Different Situations

Case 1: Clear Trending Market (Trending Market)

Steps:

1. Identify the trend (higher highs and higher lows = uptrend, lower highs and lower lows = downtrend)
2. Wait for a correction, draw Fibonacci Retracement.
3. Enter buy at 38.2% or 50% retracement in an uptrend (and vice versa for downtrend)
4. Set targets at Fibonacci Extension levels 161.8% or 200%.
5. Adjust Stop Loss below/above previous swing points.

Case 2: Range-bound Market (Range Market)

Steps:

1. Identify the high and low of the range.
2. Draw Fibonacci Retracement between these points.
3. Buy at support (23.6%, 38.2%) and sell at resistance (61.8%, 78.6%)
4. Close positions when price breaks out of the range or approaches the boundary.

Case 3: Reversal Setup (Reversal)

Steps:

1. Observe strong trend momentum.
2. When signs of weakening appear (RSI Divergence, Price Action Rejection), draw Fibonacci Retracement.
3. If the price breaks key Fibonacci levels in the opposite direction of the current trend = trend reversal.
4. Enter short (or long) positions accordingly.

Pros and Cons: Strengths and Cautions

( Advantages

✓ Easy to understand and apply ✓ Works across all asset types )stocks, forex, crypto### ✓ Helps plan entry, exit, and stop-loss points clearly ✓ Combines well with many other tools

( Limitations

✗ Drawing depends on individual point selection )Subjectivity### ✗ Relying on a single tool without confirmation can give false signals ✗ Price may not stop exactly at the expected Fibonacci levels ✗ Experience is needed to judge which levels are most significant

Summary: Why Fibonacci Still Works Today

The reason Fibonacci remains effective is because these ratios are increasingly used by retail traders, institutions, and automated trading algorithms, making it a Self-Fulfilling Prophecy. Many believe it will work, so they use it, which in turn makes it truly effective.

Support and resistance levels derived from Fibonacci are often shared subconscious points among market participants. Whether intentionally or not, prices tend to oscillate around these lines before deciding on a direction.

Final advice: Don’t rely solely on Fibonacci for trading decisions. It should be part of a complete trading system that includes money management, risk control, and overall market analysis. Practice on real charts until you feel comfortable with this tool.