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Fibonacci Extension: How It Helps Traders


In today’s lesson, we will demonstrate an example of an H4 chart that makes a breakout heading towards the North. However, the chart does not offer entry. We try to find out the reason behind it.

It is an H4 chart. The chart shows that the price makes a good bullish move. Thus, the weekly candle ends up being a bullish candle. Let us proceed to the next chart to see how the price starts next week.

The first candle comes out as a bearish engulfing candle. However, the support level where the price had a bounce and headed towards the North is intact. The buyers may eye on the chart for the price to have a bounce and make a bullish breakout at the weekly high.

The chart produces a bullish inside bar. The candle is produced right at the level of support. It is not a strong bullish reversal candle, but things look good for the buyers.

The chart produces three more bullish candles breaching the level of resistance. The buyers are to wait for the price to consolidate and produce a bullish reversal candle to offer them a long entry.

The price keeps heading towards the North without having consolidation. In naked eyes, it seems that the price has traveled a long way. If it consolidates now, should the buyers go long?

The chart produces a bearish candle. It means the price may consolidate now. The breakout level is far away. If the price makes a bearish correction up to the breakout level, it will come out as a long bearish wave. This often changes the trend or makes the price get choppy, at least. Let us draw a Fibonacci Extension and explain it with the Fibonacci levels.

We know when the price makes a breakout; Fibonacci Extension can be used to determine the wave’s length. The breakout length is measured at 23.6%. The best level for the price to consolidate within 23.6% to 38.2% or 38.2% to 50.0%. Over here, the price consolidates within 61.8% to 78.6%. It means the price does not have much space to travel. Thus, the buyers may skip taking entry on this chart as far as the risk-reward ratio is concerned. The price may go up to the level of 100.0%, but it often ends up being choppy or makes a reversal in such cases. This is when Fibonacci Extension comes out as a handy tool with what traders can determine the trend’s potential length and calculate whether they should take an entry or not.


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