Forex Education-Fibonacci Expansion

Fibonacci expansions levels

     Fibonacci expansions are retracement levels beyond the usual 100%. If you are in a buy trade and price exceeds 100%, the expansion levels can be used to find a target.

Supposing you have two waves that are in an uptrend, if you apply the Fibonacci retracement on wave 1, it can’t be used in identifying where wave 3 would possibly end.

 
This is when Fibonacci expansions come in. Fibonacci expansions are normally used for predicting the end of the third wave in an Elliot wave cycle. That means the first two waves have already formed.

To apply the Fibonacci expansion, click on “Insert” in the main menu of your MetaTrader4 platform. Click on “Fibonacci” and select “Expansion”. 

 

In an uptrend, apply the Fibonacci expansion by connecting the lowest low (1), the next swing high (2), and the next swing low (3). In a downtrend, you should start applying the expansions by connecting the highest high (1), the next swing low (2), and the next swing high (3). 

The usual values for the Fibonacci expansions are 61.8%, 100% and 161%. However, you can add more levels by following the same steps in adding the levels for Fibonacci retracements. Below are the values you can use.

Have a look at the example below. In this uptrend, waves 1 and 2 have already formed.
The Fibonacci expansions show the possible levels that wave 3 ends.

After a few hours, wave 3 reached 113% then almost touched 127%. 

 
But, what if you’re not f amiliar with the Elliot waves ? You can still use the Fibonacci expansions

 Even if you’re not f amiliar with the Elliot waves, Fibonacci expansions are also useful during breakouts after a period of consolidation.

Supposing you have a ranging market, and the price breaks the support or resistance level. The expansions will help identifying where the price will most likely retrace. Have a look at the example below. 

We have a downtrend because the price broke the support level. This expansion is applied by connecting the swing high, swing low and the most recent swing high. Usually, the price will reach the expansion levels depending on the strength of the move. The targets are normally 100%, 113%, 127%, 141.4% and 161.8%. Now, the price has already reached 100% so we are looking for the next targets.
  

As you can see, price reached all the targets in the next few hours. Pretty cool, right?
 

 

However, not all situations are as pretty as this, so it’s good to be cautious and use other indicators and trading techniques to back you up. 
  

Have a closer look at the last example once again. Notice that if you draw a line connecting the first swing high and the swing low, you actually have Wave 1. If you connect the swing low to the next swing high, you have Wave 2. Finally, Wave 3 can be seen if you connect the last swing high to 161.8% Fibonacci expansion level.

 
Following Wave 3, the price moved up to form Wave 4. And right now, we are waiting for Wave 5 to form.
The main difference with Fibonacci retracements and expansions is that retracements are applied using two points while expansions are applied using three points. Also, expansions are used when retracements cannot be applied.