Trade Stock Indices

Indices Fibo Expansion Levels

Earlier, we covered Fibonacci retracement, drawn between two points. But for Fib expansion, you need to mark three points on the chart.

To establish these reference lines, we wait for the price pullback process to finalize, at which point the trading price begins to advance in the same direction as the prevailing trend for the Index. The point reached by this retracement is designated as point number 3.

The illustration explained & illustrated below shows the 3 Points where the Fib extension is drawn, marked as 1, 2 and 3. 1 is where the market trend started, 2 is where the trend pulled back and retraced & 3 is where the retracement reached as illustrated on the trading illustrations expounded below.

Methods for Drawing Fibonacci Expansion Levels on Index Charts and Understanding Fibo Extension Points

Remember where these levels are marked – they're marked over the trading indicator, marking the specific spots where traders should set their take profit orders.

Drawing Extension Levels on an Upwards Trend

We use Fib expansion levels to predict the level where price changes will reach, and there are two really important extension levels: 61.8% and 100%, and we use these for taking profits.

In the examples, draw Fib extension along the trend. For uptrends, draw it upward.

These levels show up as horizontal lines above the indicator - they mark where you should take profits. In the trading example below, if you used the 100% extension, you would've made a solid profit.

Take note that this is the same transaction from the prior example, where we employed Fib retracement to make a purchase at about the 38. 2% retracement level. Additionally, we have employed Fibonacci extension 100% to determine take profit. Try out these strategies now by looking for a Indices chart.

Fibo Extensions in Uptrends - Expansion Levels on Index Charts

From the examples above, you can see the upward trend kept going. Both the 61.8% and 100% levels got hit. After price reached that 100% extension, it pulled back again.

Drawing Extension Areas on a Downward Trend

Given that we utilize this tool to assess or estimate take profit orders, how should we represent it during a downward trend?

We draw it from point 1 to point 2 to point 3, as shown below. Always draw this tool along the market's price trend. In the example below, what direction did we use? Downward, that's correct.

Compare the drawings above and below. Use a 100% extension level this time. Price hit a solid spot for taking profits.

Fibonacci Expansion Applied on a Downward Index Trend - Chart Levels for Fibonacci Expansions

From the trading example illustration shown above, after drawing this tool there are 2 levels that are used to display the profit booking areas, these 2 are drawn as horizontal lines across the trading price chart.

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