Fibonacci Extensions  

An old trading adage says "Buy on the dip. Sell on the high." Here I will introduce a practical application of that adage using Fibonacci ratios known as extension levels.

If you were to buy on the 'dip', extension levels would define the 'high' where you would sell. Graphically, we can illustrate by using the points A, B, and C.



Price has trended up from point A to point B. The total increase in price is represented as 'B-A'. Price then dips to point C. This is where we would buy. Point C (the Buy point) can be taken from Fibonacci Retracement levels. (ie. 23.6%, 38.2%, 61.8%, or 78.6% retracement.)

Once a buy order is taken, a profit target needs to be determined. This is where extension levels come in. The following chart illustrates various extension levels. I use terminology taught by Joe DiNapoli for the levels. The first is "COP" which stands for Contracted Objective Point. The second is "OP" which stands for "Objective Point". And the third is the "XOP" which stands for "Extended Objective Point".

It is based on the math shown below using the Golden Ratio of 0.681. There are four different columns showing extension levels that depend on the level of retracement.

ABC Extensions	C = 0.618	C = 0.382	C = 0.236	C = 0.786
(B-A) X 0.618 + C = COP	1.236	1.000	0.854	1.404
(B-A) x 1.00 + C = OP	1.618	1.382	1.236	1.786
(B-A) X 2.00 + C = XOP	2.618	2.382	2.236	2.786

Generally, I only use the extension levels based upon a retracement of 61.8%. And my target will always be the COP point (1.236). That is more than enough profit for a single trade.