Fibonacci in the daily view can be a very powerful tool in formulating a trade plan. This attached chart is of recent price action in the daily view on the EURUSD as it navigated through the fibonacci retracement levels and then eventually made it down to the 1.618 Fibonacci Extension Level. If you are new to fibonacci, the retracement levels in the study predict price action to the extension levels that are below the zero line or below the low of the study. In this chart you will see +21.4, +38.2 and +61.8… these are the extension levels that are 21.4%, 38.2% and 61.8% below the zero line at 1.11235 in this study. Take the measurement from the high at 1.13684 to the low at 1.11235 and you get roughly 250 pips. So, the +21.4% extension is 250 pips x .214 = 53.5 pips and the +38.2 extension is 250 x .382 = 95.5 pips and the +61.8 extension is 250 x .618 = 154.5 pips. These extensions are also sometimes referred to as the 1.214, 1.382 and 1.618 extension levels. But for simplicity I use +61.8 for the extension and -61.8 for the retracement, which is a pullback. The +61.8 is 154.5 pips below the low and the -61.8 is 154.5 pips above the low or above the zero line of the fib study. It seems simple to think of it as plus and minus for me.
Notice that on 9.08.16 price retraced to the daily -78.6 retracement level and on 9.15.16 and 9.26.16 the -61.8 retracement level held to form a double top in the daily view. The -50 retracement level follow a few days later with another double top and price sold off aggressively. Price finally came to rest at the +61.8 extension level or the 1.618 extension level as most traders know it and fibonacci theory played out basically perfectly here.
I believe the bearish confidence below the zero line at 1.11235 was greatly related to this daily fibonacci study because traders were targeting the fib extension levels and the 1.618 extension level in particular. Lower highs were formed at the 78.6, 61.8 and 50 retracement levels respectively for days and then price slowly fell through support to make it out to the extension levels and there was great bearish confidence when the zero line support (highlighted in green) was broken, because the extension levels were the targets.
This type of analysis works in all time frames. The pullback to the retracement levels predicts the movement of price action out to the extension levels. This daily fibonacci study followed fibonacci theory in the daily view basically to the pip. So, I thought to throw this chart up as a case study for the FX.Today community to review. Big money in the FX game obviously likes to use fibonacci analysis in the daily view, so it is good to keep your eye on it.
In formulating a trade plan using fibonacci theory, you target the extension levels once price is stopped by the retracement levels. In this example a series of lower highs in the daily view which found resistance at the retracement levels proved that price wasn’t climbing higher so the extension levels were targeted as profit targets to complete the trade plan. Fib retracement to fib extension is often a great trade plan or great adjunct to a larger trade plan.
In this example if you could have recognized the double top at the -61.8 retracement level and you targeted the 1.618 extension level or the +61.8 as I like to call it. Then, you would have set up at 300 pip trade plan in the daily view. Price retraced 154.5 pips up and then shot down 154.5 pips below the low to the expected extension target, which is over 300 pips.
You could have also just targeted the zero line and picked up 154 pips and waited to see if support was going to break or not and then created another trade plan to target the daily fib extensions.
I added a second daily fib study that was initiated on 5.03.16 and played out directly before the fib study analyzed in this article.