Trend-based Fibonacci extensions

Technical Analysis
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What is Trend-based Fibonacci?

Trend-based Fibonacci extensions are a technical analysis tool based on the Fibonacci sequence, used to identify potential support and resistance levels after a price trend. They differ from standard Fibonacci retracements by using three points instead of two, allowing for more dynamic predictions.

What you need:

  • A price chart of the asset you’re analyzing.
  • The Fibonacci sequence (0, 0.382, 0.5, 0.618, 0.786, 1, 1.618, etc.).

Steps to Use:

  1. Identify the Trend: Locate a clear uptrend or downtrend in the stock’s price chart.
  2. Choose Three Points: Select three points on the chart:
  • Point 1: The start of the trend (e.g., a swing high for uptrends, swing low for downtrends).
  • Point 2: The end of the trend (e.g., the following swing low for uptrends, swing high for downtrends).
  • Point 3: The end of a retracement against the trend (e.g., a swing high within the downtrend, swing low within the uptrend).
  1. Draw the Fibonacci Lines: Use the Fibonacci extension tool on TradingView to draw lines extending from Point 3 through Point 2, intersecting the trendline at various Fibonacci ratios (e.g., 38.2%, 50%, 61.8%).

Example :

Let’s consider Reliance Industries (RELIANCE.NSE) on a daily chart.

  1. Identify the Trend: Uptrend from March 2023 to August 2023.
  2. Choose Points:
  • Point 1: March 2023 swing low (start of uptrend)
  • Point 2: August 2023 swing high (end of uptrend)
  • Point 3: October 2023 swing low (retracement within uptrend)
  1. Draw Fibonacci Lines: Extend lines from Point 3 through Point 2, intersecting the uptrend line at 38.2%, 50%, and 61.8% levels.

Interpretation:

  • Price might find support around the 38.2% or 50% levels, potentially bouncing back from there.
  • If the price breaks above the 61.8% level, it could indicate a continuation of the uptrend.
  • Remember, these are potential levels, not guarantees. Use other technical and fundamental analysis tools for confirmation.

Key Points to Remember:

  • Consider using other technical indicators alongside Fibonacci extensions for a more comprehensive analysis.
  • Backtest the use of Fibonacci extensions on historical data to see their effectiveness in your chosen market.
  • This is a simplified explanation. There are different interpretations and variations of using trend-based Fibonacci extensions.

Learn more about Fibonacci Retracement Strategy in this video:

*Disclaimer: This post has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.*

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