The relationship between Fibonacci retracements and Fibonacci extensions

Posted on 2023-05-05

Fibonacci retracements and Fibonacci extensions are two popular technical analysis tools that are often used by traders to identify potential price levels in financial markets.

Fibonacci retracements are based on the idea that markets tend to retrace a predictable portion of a move, after which they may continue in the original direction. The key levels for Fibonacci retracements are based on ratios derived from the Fibonacci sequence, a series of numbers in which each number is the sum of the two preceding ones (0, 1, 1, 2, 3, 5, 8, 13, 21, etc.).

Fibonacci extensions, on the other hand, are used to identify potential price targets for an asset once it has broken out of a key level of support or resistance. They are also based on ratios derived from the Fibonacci sequence, but are drawn from the low to high (or high to low) of a move, rather than the retracement levels.

In some cases, traders may use both Fibonacci retracements and extensions together to identify potential areas of support and resistance as well as price targets for an asset. For example, a trader may draw Fibonacci retracements from a swing low to a swing high, and then use Fibonacci extensions to project potential price targets beyond the swing high.

It's important to note that while Fibonacci retracements and extensions can be useful tools for identifying potential price levels, they should not be relied on exclusively for making trading decisions. They should be used in conjunction with other technical analysis tools and fundamental analysis to gain a more complete understanding of the market.

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