The markets move in bull and bear cycles in different patterns and cycles. As a trader we try and forecast this movement, and try to find high probability entry. To assist in this task we use different indicators and tools have been proven to help us be more accurate.



The tools and indicators we might use include moving averages, Bollinger bands and overbought / oversold indicators. There are even now those of us that use Fibonacci tools to identify high probability entry and exit. A little practice with the Fibs. tool-set can produce some amazing results.

I want to cover in this article how to use Fibonacci extensions and retracements. These are the most popular of the Fibonacci tools for use in trading stocks, options or forex. If you want more accuracy and precision these tools are absolutely critical.

When we say Fibonacci retracement we are talking about a corrective wave. If we say extension were referring to an impulse wave. So with a retracement we are referring to where price will retrace to before reversing into the prevailing trend. Likewise with extensions we are measuring where price will "extend" to, to make a new high.

If you retrace your footsteps to find a lost item you are going back right ? Exactly like retracing your footsteps a Fibonacci retracement is retracing old territory. We are literally measuring the pull-back and where it moves to before resuming the trend.

If your in a bullish cycle and price has made a new high and is correcting or falling we want to measure the low and the high and pinpoint potential retracement levels. The next step is to watch and see which level becomes support for price. The most common and most used Fibonacci evels are:

* 23.6 - You might call this level 1, as its the first level price will hit, but usually pass through. If price does reverse here it indicates a pretty strong market in that direction. * 38.2% - This level is also I would say uncommon. But a reversal here indicates a strong undertone as well. * 50% - This is half of the impulse waves move. It is a common reversal zone and needs to be watched closely. * 61.8% - This level is the point of no return in my opinion. If we move beyond 61.8% chances are the original trend is over or seriously losing strength. * 100% - Reaching this point simply means we are right back where we started and are no longer making higher highs and higher lows.

Once we measure the low and the high a typical Fibonacci retracement tool will lay out the retracement levels starting with 23.6 and ending at 100%. This makes it easy to see the levels and wait and see what price does at these levels.

Now if price let's say retraces to 38.2% and we see a clear and strong reversal, the question then becomes when do we get out and this is where extensions come in.

When you begin to lay down your Fibonacci extensions you will notice that additional lines might get laid down automatically depending on the tool your using. These are called extensions and they are to measure the move after the retracement beyond 100%. Look to 161.8% and 261.8% for a good target.