Understand & Use Fibonacci Ratio’s Understand & Use Fibonacci Ratio’s Part.3

FibonacciExpansions
by Sunil Mangwani

Fib Expansions – Fib Expansions –
The Fibonacci expansion is a great tool for establishing profit targets.
• It offers a distinct advantage over the other usual fib ratios, since it isn’t as
widely used by traders.
• Rather than drawing levels “behind” the market, the fib expansions draw them
in “front” of the market.
• In other words, if the market is moving up and making new highs, the standard
fib retracements will draw levels BELOW the current price, but the fib
expansions will draw levels ABOVE the current price.

Plotting Fib Expansions Plotting Fib Expansions
• For plotting the Fibonacci Expansions you need 3 points, and the basic
technique for an uptrend, is to plot it off a Low, and High and a Higher Low (or
for down trends - a High, a Low and a Lower High).

Plotting Fib Expansions Plotting Fib Expansions
• We measure the distance from Point A to Point B. However, we can’t project
price targets until Point C has been established. Only when Point C has been
formed do we have the necessary three swing points.
• In short, we identify a trend that has started and pulled back, forming Points A
and B, and wait for Point C to form.
• Once Point C has formed, we plot the Fibonacci Expansion Tool on Point A,
Point B, and Point C.

Fib expansions – the 0.786 level Fib expansions – the 0.786 level
• The FE's that we use have 5 levels marked by fib levels – 50.0%;
78.6%; 100.0%; 127.2%; 161.8% & 261.8%.
• Of all the ratios, the 50.0 & the 78.6 levels hold a lot of
importance.
• A break of the FE 50 is an indication of the continuation of trend.
• And subsequently, the break of the FE 78 becomes the
confirmation of the change. The FE 78 is the level, from where
price has a very high probability of retracement. We can thus call
this as “The Barrier Level” as it is the level of high probability for
trend change.
• Once price closes beyond FE 78, there is a high probability of
the trend continuing. (The requirement is a close of a candle
outside this level, and not just a penetration of the level)

Fib expansions Fib expansions
Ideal situation to use in –
• It’s especially significant to draw the FE levels at turning points in the
market, which is when the market is putting in its first Higher Low or
first Lower High.
• Fib Expansions are useful in identifying potential price levels where you
might want to take partial positions off the table to lock in some trading
profits. They can be used very effectively to calculate the reward to
expect, for the risk you are taking.
• Once you have plotted fib expansions, wait for price to break the FE 50.
The continuation is confirmed only if price breaks the FE 78. However,
at each FE level, one must observe price action to determine if price will
continue further.
• If price breaks a FE level, it has a very high probability of going to the
next FE level. For example, if price has closed above the FE 78, the
probability of it going to the FE 127 is very high.
• For a valid entry into a FE level, one must have a candle close within the
FE level. (Candle close of the same time frame that one is referring to)

Use of the Fib expansions.1 Use of the Fib expansions.1
• 1.) To determine the future levels of resistance (in case of an uptrend)
• We can plot the FE levels within any price wave which gives us the 3 points as
required – a swing low, a swing high into the uptrend, and then a pullback
giving a lower high.
• (An important point to note is that, the third point should be a higher low. In
case this pullback goes below the previous swing low, the situation does not
warrant the use of a Fib expansion.)
• In such cases, as mentioned earlier, a safe entry into the long trade would be
the break of the FE 78 level, with the stop beneath the third point (the higher
low), and targeting the future fib levels.
• Hence we can calculate the Risk-to-Reward ratio, and also decide where to take
partial profits, and where to exit the trade.

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