2 Ways to use Fibonacci Extensions
Hello traders, Rishi Patel, co-founder of Master the Markets, Elite Traders Conference and The
Traders Open Day. A very warm welcome to this video on two ways to use Fibonacci
Now, be aware that Fibonacci extensions are also called Fibonacci Expansions. They will be
different on different charting software. Therefore, for the purpose of this video we will be using
the word extensions. Before we start talking about the differences between extension and
expansion, let’s talk about what they actually are. Something relationship? Hang on a second
are you at the right YouTube channel? This is Master the Markets, right? Absolutely, because
Fibonacci extensions are “mathematical relationships between one price wave and the next”.
This is all a Fibonacci extension really is. So, why do we use these? and how do they help us?
There is a couple of reasons for these.
First of all, Fibonacci extensions give us the opportunity to mathematically target set. Therefore, one of the important things that we use them for is exits for the market. Now, if you are already trading the markets and you currently have a couple of
years of experience, you may be struggling with your exit from the market. You may not have a
problem getting into the actual opportunity and letting it run making it into a profit. However, you
may have a big issue at making a bottom line profit because you do not know when to exit the
market. What I am showing you here is one mathematical tool you can use to exit the market on
a consistent basis, if of course, you are using quantified swing high and swing lows which are
mandatory to using any Fibonacci work. I want to show you a mathematical method of exit that
you can then reproduce and scale.
Secondly, we use Fibonacci for target setting. It will give us potential opportunities to get out at certain key Fibonacci extension levels such as 161.8%, etc.In a moment, I will show you a couple of key levels which you could use to exit the market for the Fibonacci extensions as well. They are also used to, and you may be wondering what this is, Fibonacci extensions allow you to scale-in and scale-out. When scaling-in to the market, you are adding to your position. Let’s say you have two lots running on a position already, you are trading EURUSD and you get to a key extension level which couldn’t necessarily be an exit. You can then decide to scale-in at the position to get to the next level up. Of course, you need to key into your money management rules. Everything needs to be risk managed and tested before you can even think about doing things like that. At a professional level, you may be looking to scale-in to a trade for those of you that are already trading. For those of you that are new to it, stay tuned there is some interesting stuff coming up on this side (pointing at the board). Scaling-out of the trade is a possibility as well. Let’s say that you get to a key level on the Fibonacci extension, and maybe you decide to take part of the profits and come out of the position. Let’s say you decide that at 161.8 you are going to close out 50% of your position. You are running these two lots on the EURUSD and you get to 161.8 Fibonacci extension, which I will show you in just a moment, and you decide to actually pull out half of your position. But, according to your trading plan, you got concise rules that tell you there is a high probability that the trade can carry on running up to the 200% level. That is obviously a possibility, and you may scale out of the trade and run half the position up to the next target level up if/and/when it gets there. That is scaling-in and scaling-out. Those are the two ways in which you can use Fibonacci extensions for adding to a trade or target setting.
The next thing I want to do is to show you two ways in which you can use the waves and the
faces from a mathematical perspective to exit the market. There are two ways you can do this.
As most of you know, if you have already subscribed to our YouTube channel, we have
launched a video on bar patterns and waves & faces. In those previous videos, you have seen
about these distances from point to point. We are looking for here -pointing at board- between
the HLOC bars. We do not draw the bars individually on the board, and that is why these lines
exist. If a beginner trader, you understand that these are just HLOC bars, but I am joining Highs
and Lows in a nutshell. This is an upward trend, I am connecting this swing high and this swing
low and I have drawn is draw a bar. Though, you can see there is another swing high/swing low
and that can potentially another bar as well. The reason to draw these, according to our two key
ways of using the Fibonacci extensions. In order to have a Fibonacci extension we need three
points; the starting point, which we will call zero; the end point, and we will call it the 100%; and
then it also needs another zero point as a reference point. What this tells you is that the
distance from here to here is forward projected upwards starting from the reference point. This
allows to project the equivalent distance from point zero to point 100% onto the point zero on
the reference point. This means that you can start to see what the key levels are at 161.8%,
200% levels as well for target setting. This was the first way to use the Fibonacci extension. The
second way of using the Fibonacci extension is not to use the distance from point zero on the
reference bar to point 100% on the reference bar, but instead to forward project from above
where the original range was. You will forward project from the point 100% on the original bar
forward. These are the two ways to in which you can use Fibonacci extensions, and that is it
from me on this video.
I know that this video has added a lot of value, especially to all the new
traders. This is a critical tool that we can use to mathematically calculate exit points, so do take
note of it and research further. Include this tool to your arsenal and see if it fits with the rest of
your crib sheet.
Once again, thank you for watching. As we always say, stay disciplined, follow your plan, and
Trade Like a Master.