have an account?【sign in】what is the difference between fibonacci retracement and extension?
nagaauthorThe Differences Between Fibonacci Retracement and Extension
The Fibonacci retracement and extension are two important technical analysis tools used in stock trading and investment. They are based on the Fibonacci sequence, a mathematical principle that has been widely applied in various fields, including finance, art, and even astronomy. While both tools can help investors make better decisions, they are not the same. In this article, we will explore the differences between the Fibonacci retracement and extension and how they can be used to make informed trading decisions.
Fibonacci Retracement
The Fibonacci retracement is a method of analyzing a stock's price action to identify potential support and resistance levels. It is calculated by dividing the distance between two consecutive highs or lows by the total distance traveled by the price. The Fibonacci retracement levels are: 61.8%, 50%, and 38.2%. These levels are often used as entry and exit points for trading strategies.
Fibonacci Extension
The Fibonacci extension is similar to the retracement in that it also uses the Fibonacci sequence to identify potential support and resistance levels. However, instead of using the distance between two consecutive highs or lows, the extension uses the distance between the current price and the next higher or lower Fibonacci level. The Fibonacci extension levels are: 100%, 61.8%, 38.2%, and 23.6%. These levels are often used as targets for trading strategies.
Key Differences
1. Calculation: The Fibonacci retracement is calculated using the distance between two consecutive highs or lows, while the Fibonacci extension is calculated using the distance between the current price and the next higher or lower Fibonacci level.
2. Use: The Fibonacci retracement is used to identify potential support and resistance levels, while the Fibonacci extension is used as targets for trading strategies.
3. Applications: The Fibonacci retracement and extension can be used in various trading strategies, such as trend following, countertrend trading, and support and resistance trading.
4. Confluence with Other Technical Indicators: The Fibonacci retracement and extension can be used in conjunction with other technical indicators, such as moving averages, relative strength index (RSI), and stochastic oscillator, to improve the accuracy of trading decisions.
The Fibonacci retracement and extension are two important technical analysis tools that can help investors make better decisions when trading stocks. While they share some similarities, they also have key differences in their calculation and use. By understanding these differences, investors can better utilize these tools to make informed trading decisions and achieve better investment returns.