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# Foundations of Fibonacci Extensions

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Introduction

A very popular application of Fibonacci deals with the projection of levels up to where price is expected to further develop. In the article “Foundations of Fibonacci Retracements” (https://forex.academy/training/technical-analysis/beginner/foundations-of-fibonacci-retracements/) we covered how to use Fibonacci to locate price areas where impulses could bounce in every wave of a given trend, as well as to its application for risk management (i.e. where to set the Stop Loss). In the following article, we will introduce readers to the basic Fibo extensions as a good set up to exit winning positions.

The first step of the analysis is to draw boxes on the price chart that represent the distances between the top of the range and the closest which Fibonacci retracement level, and from that point to the closest low or high and so on. Priority must be given to the height of the boxes and not to the width. Each box will be subdivided between the Fibonacci retracement levels to determine the percentage ratios within the boxes; these levels may be a guide to fix a target price. However, the problem with the projected boxes is that we won’t know exactly whether such subdivisions are resistances or major supports, i.e., we don’t know how likely it is for the price to reach such levels.

To establish the robustness of the boxes´ subdivisions, i.e., how strong price will be contained, the last range of the box should be subdivided if it is in a bearish trend market to the line ending the box using Fibonacci retracements. And the strategy would be to wait for these areas to respect the market and rebound the price or continue to fall. Using this strategy to draw boxes from the Confluence zone to the limit of the range either higher or lower and replicate this box in the opposite direction, and then subdivide the box into Fibonacci levels does not always ensure that there is a successful trade, so you should use more analytical tools; and the first step is to have the confluence areas analyzed before and from this, project the boxes.

In some cases, the boxes will not share the same edges as the confluence zone due to, for example, gaps between both boxes. To find out which prices are areas of resistance or larger supports, inner boxes of other boxes must be carried out between the current price and the nearest percentage that would be of 38.1% and in this inner box are made the subdivisions with the Fibonacci levels which create areas of confluence that show that zones are supports or greater resistance.

To make this concept clearer, two examples will be presented below. The first example will be NOK/SEK. It is a market with a bearish tendency so you want to find supports that the market could respect and bounce, or find supports to where the market could reach if you continue lowering. At the beginning of the confluence zones were determined and from there, the graph of the upper table was created. This box is then replicated at the bottom of the confluence zone and the Fibonacci levels are determined within this. Having these three boxes you can see the smaller supports that the market has before reaching the minimum price. To find out which of these are areas of larger supports would have to draw another box in the smaller one to have areas of confluence. After having the three boxes drawn, you can see a blue line where a major support is located because it is a zone of confluence and the market should respect these levels of prices. The second example is the USD/CHF asset, which is at a similar stage to the first example. The procedure is the same, being the first step to find the confluence zones with the Fibonacci retracements because it gives more strength to the analysis of price projection to be achieved with the boxes. As mentioned in the previous articles, the market gives clues on where to draw the ranges and boxes that at the end show areas of confluence. Care should be taken with graphics that have gaps as this will generate the drawn boxes do not share the same edges.

### Introduction to Fibonacci Expansion

Another method used by traders is the Fibonacci expansion and the objective of this tool is to determine the third oscillation. Unlike Fibonacci regressions, this tool uses the market fluctuations instead of the bias for its construction. With the Fibonacci expansion, traders will be able to obtain signals of how the waves evolve, and with the analysis of the waves could be projected where the end of the bias is and the following rebounds that will suffer the price.

The important percentages used by the tool are 0618, 1,382.1, 1.5 and 1,618; These percentages must be expanded along the graph to touch the axis and to verify that they are important areas that the market has respected in the past. Several ranges have created starting from the same starting point to find zones of confluence and thus to see zones that are resistances or supports. It is important to keep in mind that if you are going to trade on long horizons of time, you should observe more data from the past that will allow for a clearer picture.

As in the article “Foundations of Fibonacci Retracements”, with this type of analysis, if you want to find a major support, you must start from a high price and go down in the graph to a low price where there is a market signal that shows significance at this level. To know where the high price should be located, a market correction point should be chosen. After having a certain range for the analysis, a box is drawn from the higher price chosen to where the bias is triggered. Then a second range will be drawn starting from the highest point, which was used for the first box and lowered in the graph to where the Fibonacci ratios seem significant. When both boxes are subdivided into the Fibonacci ratios, there are confluence areas which represent larger supports or resistances, which will be added to the confluence areas analyzed above. The short-term confluence zones will serve in the long term and vice versa, so it`s suggested to observe different horizons of time to appreciate various important levels. Using the Fibonacci expansion as given by the various trading programs and programming correctly, the graph of the market should be seen in the following way where, as with Fibonacci retracements, areas of confluence should be found to know that Fibonacci ratios are higher supports for the market. ### Elliot Wave Principle

Elliot’s principle is based on the discovery of Ralph Elliot who discovered that the price of the action was not random, on the contrary, it follows a certain logic and order. Elliot saw the same patterns repeating in different cycles, which reflected the prevailing emotions of investors. The movements were called waves. The basic interpretation of Elliot’s principle is that every action has its reaction. When there is a bullet market there are 5 waves moving in the direction of the bias and after this is exhausted there is a three-wave movement. In the next graph, you can see the waves that compose a bull market. The waves numbers 1,3 and 5 are impulse waves and numbers 2 and 4 are correction waves. While the bias exemplified by the letters shows the correction of the whole upward bias. Having explained the principle of Elliot’s wave can be related to the Fibonacci expansion. As mentioned before, the Fibonacci expansion will allow projecting an objective price to where the market price will reach, the Fibonacci projections are calculated after an impulsive phase is produced with its subsequent correction. The projection of 0.618 and 1 is usually used for the waves 5 once the waves 3 and 4 are located, the projection of 1,618 is usually given in the waves 3 once we have located the waves 1 y2. Finally, the projections of 1 and 1,618 usually appear in corrective waves C when the waves A and B are already located.