Fibonacci extensions are horizontal lines drawn on a price chart to indicate potential price levels where a trend may target or reverse.

 to achieve better forecasts, resulting in consistent trading gains. They are a powerful tool that can help you identify price targets, 

, and potential market reversals. Below, we’ll look at what they are, what they indicate, how to draw them, and how Fibonacci extensions and Fibonacci retracements compare to each other.

 These levels are calculated by applying Fibonacci ratios (typically 0.618, 1.000, 1.272, 1.618 and 2.618) to a significant price swing or trend. Traders use these extensions to identify areas of support and resistance when deciding to take profit or make a reversal trade.

While the choice of Fibonacci extension levels ultimately depends on the trader's strategy and risk tolerance, certain levels have proven to be more reliable. The most commonly used Fibonacci extension levels include 0.618 (61.8%), 1.000 (100%) and 1.618 (161.8%), with 0.618 often regarded as a strong support or resistance level. According to 

, 1.000 is a common target for corrective wave patterns, and 1.618 is also called the “golden ratio,” viewed as a potential target for price extensions.

Determining the best time frame in which to trade Fibonacci levels largely depends on the trader's style and preferences. Fibonacci extension levels can be applied to any chart time frame, be it short-term intraday charts or longer-term daily or weekly charts. Shorter time frames, such as 15-minute or hourly charts, are preferred by day traders aiming for quick profits, while swing traders and investors often focus on daily or weekly charts to identify larger price targets and trends.

A trader who correctly applies the Fibonacci extension tool to significant price swings is armed with potential reversal points. This is a huge benefit for traders looking to exit the current trend or enter a trade on the next trend change.

Fibonacci extensions on a price chart reveal critical levels that indicate where a price move might extend to or encounter a rejection. These levels are calculated by multiplying the length of a previous price move by Fibonacci ratios, such as 0.618, 1.000, 1.272, 1.618 and 2.618. Traders use the levels to identify potential support and resistance and to set profit targets.

One of the primary insights Fibonacci extensions provide is the identification of price projections and profit targets. The levels obtained enable traders to anticipate where a price trend may potentially halt or encounter resistance, allowing them to plan their trades accordingly. For those already in the trade, these key price zones offer profit levels to consider closing the trade. For traders not in a position, these potential reversal zones may offer them the opportunity to place a reversal trade.

Traders skilled in technical analysis and Fibonacci extensions will seek out overlap and confluence of key levels on different chart time frames. When this overlap of price levels appears, it signals harmony within the various waves, increasing the potential for a reversal.

Additionally, when you stretch Fibonacci extension levels to the historic price action on the chart, you’ll find that other support and resistance levels may line up in the same price zone. This too is a stronger signal that the support and resistance level is likely to hold, at least initially.

A Fibonacci extension comes from the numbers in the Fibonacci sequence. If you’re unfamiliar, the Fibonacci sequence is:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377 …

The next number is always the sum of the two preceding numbers, and continues without a limit. Important Fibonacci ratios are determined from this number string.

For example, let’s focus on the number 144. When you divide 144 by the number to the right of it (233), you get 0.618, or 61.8%. When you divide 144 by the number to the left (89), you get 1.618, or 161.8%.

The 1.618 ratio is considered a golden ratio for reasons beyond the scope of this article. This golden ratio is found abundantly in the natural world. As a result, it’s been applied to markets, and traders use Fibonacci to help manage their trades.

If we continue to compare 144 by two numbers to the left (55), we get 2.618, or 261.8%. In theory, you can apply this little math equation to any number in the sequence and the ratios will approach 61.8%, 161.8% and 261.8%.

Another common number is used with the extension tool at 100%. This is conceived when you compare the numbers at the beginning of the sequence (1 and 1). When you divide 1 by the number to its left (1), you get 100%.

The Fibonacci extension tool is a 3-click-tool on your charts. Here is a simple process to draw it.

Find and activate the Fibonacci Extension drawing tool in your charts. If you don’t see it initially, it might be named Fib Extension or Trend-Based Fib Extension, or it might even be mislabeled as Fib Expansion. Please note that some charts may offer the tool as a 4-click drawing, and that’s okay, too.

If the market is in an uptrend, find a swing low to start the drawing as your first click.

Then, find the next swing high in price and click again for your second click. Essentially, Fibonacci extensions measure the length of the trend between the first and second clicks.

Third, find the next swing low after the second click. This swing low should be above the swing low used for the first click. Effectively, this swing low is a retracement of the previous rally, and is lower than the swing high. Place your third click at this swing low.

At this time, the Fibonacci levels will appear as horizontal lines on your chart.

In the Bitcoin example above from 2018–19, notice how 

 stalls and hesitates near several of the Fibonacci levels (0.618, 1.618, 2.618 and 4.236).

The Fibonacci tool is also used in downtrends, using the same principles to project how deep a correction might travel.

 begins to decline in early 2022 after reaching an all-time high in 2021. Then, after a brief rally, Ethereum begins to correct even further.

After applying the Fibonacci extension tool to the decline, the 2022 price low appears at the 1.618 Fibonacci level. From the June 2022 low, Ethereum rallies nearly 100%, and the Fibonacci extension tool helps identify a support level where the correction will end.

How to Use Fibonacci Extensions to Trade Crypto

The primary use of the Fibonacci extension tool in crypto is to estimate the target price for the end of a trend.

Here are two trading strategies for how a trader might use this information.

#1: Estimate the End of a Bullish Trend to Exit a Long Trade

The first trading strategy applies when a trader is 

, and needs to know when to exit the trade.

 Fibonacci extensions can help many traders determine potential turning points.

In Mar 2022, Ethereum is rallying hard. After pausing briefly, its price continues higher, reaching the 100% level. Then, Ethereum carves a 

, one of the many candlestick patterns traders follow. Since a hanging man is a bearish pattern that forms near significant resistance at the top of a bullish trend, it suggests the market will reverse soon. The next day, Ethereum begins a decline of nearly 50%.

#2: Estimate the End of a Bearish Trend to Open a Long Trade

 in crypto can become … well, unbearable. The second trading strategy is to use the Fibonacci tool by estimating potential support to see where the correction might end. This offers traders a chance to buy into the crypto market at a cheaper price.

When drawing the Fib extension, notice how the price pauses at the 61.8% level, then eventually corrects further to the 100% extension. As tails form out of the downside of the candlesticks, it indicates the market is respecting this Fibonacci extension level. As a result, the trader can begin to formulate the trading strategy to enter in preparation for an uptrend.

In this case, once the 100% extension is reached, Ethereum rallies about 15% in just over a week.

Fibonacci Extensions vs. Fibonacci Retracements

The concepts of Fibonacci extensions and Fibonacci retracements are built around the same Fibonacci sequence. However, how you draw the tools and what information you glean from them differ.

For example, the extension tool is a 3-click tool that measures how far the trend wave is likely to travel. As a result, it requires three points to measure out the first wave, and then project it onto the next wave.

On the other hand, the Fibonacci retracement tool is used simply to see how far the countertrend wave will travel, based on the length of the original wave. Therefore, the Fibonacci retracement tool only needs two points to measure the length of the trend wave effectively.

Lastly, the most common Fibonacci levels for each tool are different. Extension levels generally fall at 100% or greater, while Fibonacci retracement levels are less than 100%

Advantages and Limitations of Fibonacci Extensions

Fibonacci extensions offer traders a valuable tool for chart analysis, aiding in identifying price targets and potential resistance zones. However, it’s vital to understand both the advantages and limitations of utilizing these extensions in order to make informed trading decisions.

: Fibonacci extensions help many traders identify potential price targets, allowing for more precise profit-taking and trade planning.

: Fibonacci extensions can be applied to any market and/or time frame, making them versatile tools for traders across different asset classes.

: Different Fibonacci extension levels can overlap or cluster around the same price area. This cluster or overlap typically leads to a price reversal, providing traders with a clue to exit trades or possibly enter a reversal trade.

: Choosing the appropriate price swing to which to apply extensions requires some practice. Traders of different skill levels may select slightly different swings, potentially leading to variations in where the extension levels land.

: While Fibonacci extensions provide valuable insights, they’re more effective when combined with other technical indicators or chart patterns to form a comprehensive trading strategy.

Ineffective in Trendless or Choppy Markets

: Fibonacci extensions work best in trending markets, and can be less effective in 

 or choppy market conditions where price swings are less prominent.

By leveraging the Fibonacci extension, traders can gain valuable insights into price projections, support and resistance areas, and potential reversal zones. While the fib extension tool has its limitations, when used in a trending market it can be applied to a variety of chart time frames, making it a favorite tool among traders.

Intermediate

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How to Use Fibonacci Extensions for Consistent Trading Gains

Stochastic RSI and RSI are indeed different. But, should you use Stochastic RSI or RSI for crypto trading? Here's what you must know!

Bitcoin is rewriting history in terms of valuations, breaking the resistance of $30,000 as of this writing (June 28, 2023). The recurring growth in Bitcoin and altcoins has spurred an army of new traders ready to dive into crypto trading. While most traders jump straight into the action, it’s always worthwhile to understand 

 that can strategize your entry and exit points for each trade. Stochastic RSI is one such indicator, allowing traders to identify market trends.

Let’s take a granular look at this technical indicator and its utility in crypto trading.

Stochastic RSI is a technical indicator built on the foundations of both the 

) indicator, It ranges on a scale from 0 to 1.

 Stochastic RSI allows a technical trader to identify whether an asset is in overbought (≥ 0.8) or oversold (≤ 0.2) territory. It takes into consideration both the RSI indicator and stochastic oscillator in order to derive market trends that are more sensitive in comparison to RSI alone. The stochastic RSI indicator (or StochRSI) thrives particularly through its ability to compare an asset's price range and closing price to support its market prediction for price turning points.

Since this indicator is closely related to RSI, it's essential to understand how the two are related. The RSI indicator tracks the momentum of an asset, for example, identifying whether a crypto asset is overbought or oversold. It measures in a range between 0 and 100, with values above 70 indicating overbought and values below 30 reflecting oversold positions.

However, RSI alone gives limited buy or sell signals, missing critical entry or exit points for intraday trading. Stochastic RSI, on the other hand, is more sensitive to market movements, allowing traders to find multiple entry/exit signals more granularly. However, it’s critical to combine stochastic RSI with other technical indicators to avoid early/late sell or buy calls.

Stochastic RSI examines the movements of the RSI indicator within a given period. It doesn’t emphasize current price levels. The most popular calculation period is 14 (days, sessions, hours or even minutes).

The resulting number is a figure between 0 and 1, swinging with a centerline of 0.5. Centerline crossovers are used primarily to confirm buy or sell signals. A move above 0.5 indicates a continuous buy signal, and a decline below 0.5 acts as a continuous sell signal. It’s essential to note that some StochRSI calculators multiply the output by 100, providing readings in the range of 0 to 100. In addition, another popular calculation duration for StochRSI is 20 periods.

As a trader, it’s critical to understand that StochRSI can be applied to any time frame for the identification of price movements or market trends.

Stochastic RSI uses RSI as its base. The StochRSI formula is as follows:

Stochastic RSI = (Current RSI − Lowest RSI) / (Highest RSI − Lowest RSI)

As mentioned, traders can apply this formula for different trading periods, including days, hours or even minutes, and every trader should understand how to read the stochastic RSI before applying it to crypto trading.

Stochastic RSI takes RSI as its input and applies the stochastic oscillator formula to arrive at a figure between 0 and 1 for any given time period.

Below is a visual representation of the Stochastic RSI. 

Crypto traders using the stochastic RSI can select any period and analyze the movement of a crypto asset. We’ll take a more in-depth look into the different ways traders use StochRSI in the coming sections.

Stochastic Oscillator vs. Stochastic RSI vs. Relative Strength Index (RSI)

These three technical indicators are used to analyze the price movements of assets, based on their strength and momentum. While they share fundamental similarities, there are some key differences.

A visual example of these technical indicators are as follows: 

How to Use Stochastic RSI for Trading Signals

One of the primary uses of the stochastic RSI is to identify trading signals. Here’s how a trader can use this indicator to interpret the movements of a crypto asset.

The chart below visualizes the use of StochRSI on BTCUSDT price movement prediction:

StochRSI measures the value of RSI over the high/low range of a period. When the actual RSI indicator records a low reading below 40, the StochRSI will be close to 0, and vice versa: if the RSI's reading records a high, the StochRSI will be close to a reading of 100.

Example: How to Use Stochastic RSI for Day Trading

Since the stochastic RSI allows traders to identify overbought or oversold conditions, it works as an excellent tool for identifying market momentum. The following is an example.

By using this strategy, traders should pay attention to the centerline (0.5); any movement above 0.5 indicates an uptrend, whereas movement below 0.5 indicates a bearish trend. Traders can place buy triggers as the value goes above 0.5. Similarly, crypto traders can use a short-sell or sell as the oscillator moves below the 0.5 level.

Crypto markets are notorious because of their volatility. Intraday trading in crypto requires a trader to identify any price reversals instantly in order to avoid significant losses. Traders can use the stochastic RSI to identify any such price reversals, and to open or close positions more effectively, due to its sensitivity to price movements. Traders are advised to use 

 as additional indicators when trading on price reversals.

For example, if the StochRSI moves above 0.80, it may imply that an asset is overbought, but it can also indicate a strong uptrend and remain above 0.80 for a prolonged period. On the contrary, if it falls below 0.2, it indicates the beginning of a strong downtrend. Any movement toward 1.0 could be considered a very strong uptrend, and any move toward 0 indicates a very weak trend.

The stochastic RSI indicator has its benefits as well as limitations. Using the stochastic RSI in conjunction with other indicators can help traders create an effective trading strategy. However, it’s not advisable to use it as your sole indicator because of higher volatility of crypto and the distant relationship with current asset prices.

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Stochastic RSI: What Is It and How Does It Work?

Technical analysis and tools are essential for traders and investors to assess an asset critically. We break down the complex concepts, and guide you in detail to help make sense of complicated candlesticks and wicks.

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How to Use Fibonacci Extensions for Consistent Trading Gains

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Stochastic RSI: What Is It and How Does It Work?

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