Fibonacci extensions are the opposite of Fibonacci retracements. While traders look to Fibonacci retracements to find turning points in price that are good, low risk areas to enter the market, they look to Fib extensions as a means to project possible exit points in the future. These extension levels are usually produced with the same tools one uses to draw Fibonacci retracements.
Fibonacci Profit Targets
Fibonacci extensions are used in conjunction with Fibonacci retracements. They balance each other like yin and yang.
A Fibonacci extension study predicts one thing: how far the trend may continue. It’s a leading indicator. It attempts to predict the future based on ratios. Using the previous example of walking up a hill of sand, if you have been taking three steps forward and two steps backward, Fibonacci would predict that your pace would remain constant. Your next progression up this hill will be three steps up and two steps back. Well, I know that doesn’t seem amazing, but wait until how you see it work on your charts!
You simply measure the previous swing high and swing low. You are assuming price will continue in the direction of the prevailing trend. If you are in a series of higher lows and higher highs, then you are expecting price to extend higher. If you are in a series of lower highs and lower lows, then you are expecting price to extend lower.
How far will price extend beyond the swing? That depends on how far it retraces. Table 2.1