how to calculate fibonacci retracement and extension levels?

The Fibonacci retracement and extension levels are crucial tools for traders and investors to use when making decisions about the direction of a security's price. These levels are based on the Fibonacci spiral, a mathematical concept that has been widely used in technical analysis for over a century. The Fibonacci retracement levels help traders identify potential support and resistance levels, while the extension levels provide an estimate of how far a security's price may extend beyond current levels. In this article, we will discuss how to calculate Fibonacci retracement and extension levels, as well as their use in trading strategies.

Calculating Fibonacci Retracement Levels

To calculate Fibonacci retracement levels, we first need to determine the price range between two significant support or resistance levels. These levels are usually identified using a moving average or other technical indicator. The Fibonacci retracement levels are then calculated using the Fibonacci ratios, which measure the relationship between two points on a percentage scale.

1. Calculate the price range between two significant support or resistance levels, such as the high and low of a moving average or other technical indicator.

2. Divide this price range by the shorter period (also known as the minimum Fibonacci length), which is usually 0.00382 or 0.00618. The result is the first Fibonacci retracement level.

3. Repeat step 2, but using a longer period (usually 0.01000 or 0.02000) to calculate the second Fibonacci retracement level.

4. Repeat steps 2 and 3, but using even longer periods, to calculate the third and higher Fibonacci retracement levels.

Calculating Fibonacci Extension Levels

Fibonacci extension levels are calculated in the same way as retracement levels, but with a different goal: to forecast how far a security's price may extend beyond current levels. To calculate Fibonacci extension levels, we first need to identify the current support or resistance level and then use the same Fibonacci ratios to project future price levels.

1. Identify the current support or resistance level.

2. Divide the distance between this level and the previous significant support or resistance level by the shorter period (also known as the minimum Fibonacci length), which is usually 0.00382 or 0.00618. The result is the first Fibonacci extension level.

3. Repeat step 2, but using a longer period (usually 0.01000 or 0.02000) to calculate the second Fibonacci extension level.

4. Repeat steps 2 and 3, but using even longer periods, to calculate the third and higher Fibonacci extension levels.

The Fibonacci retracement and extension levels are crucial tools for traders and investors to use when making decisions about the direction of a security's price. By understanding how to calculate these levels and incorporating them into trading strategies, individuals can improve their overall success rate and gain a competitive edge in the market.