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ollerauthor"Understanding the Difference between Fibonacci Retracement and Extension"
The Fibonacci sequence and its related indicators, such as retracement and extension, are widely used in trading and investment strategies. While these indicators are similar in their purpose, they have distinctive features that distinguish them from one another. In this article, we will explore the key differences between Fibonacci retracement and extension, helping you make informed decisions in your trading or investment activities.
Fibonacci Retracement
Fibonacci retracement is a technique used to identify potential turning points in a price movement. It is calculated by dividing the distance traveled by the price from its previous high or low to its current level by the total distance traveled by the price since the initial move. The retracement is measured in percentages, usually between 20% and 80% of the total move. The Fibonacci retracement levels are known as the 38.2%, 50%, and 61.8% levels, which are calculated by multiplying these percentages by the total distance traveled.
Fibonacci Extension
Fibonacci extension is similar to retracement in that it also helps identify potential turning points in a price movement. However, it is calculated by dividing the distance traveled by the price from its previous low to its current level by the distance traveled since the initial move. The extension is measured in percentages, usually between 26.5% and 73.5% of the total move. The Fibonacci extension levels are known as the 61.8%, 100%, and 161.8% levels, which are calculated by multiplying these percentages by the total distance traveled.
Key Differences
While both retracement and extension indicate potential turning points in a price movement, they have some key differences:
1. Direction: Fibonacci retracement indicates a potential reversal point, while Fibonacci extension indicates an extension of the price move in the same direction.
2. Calculated Method: Fibonacci retracement is calculated by dividing the distance traveled by the price from its previous high or low to its current level by the total distance traveled since the initial move. Fibonacci extension is calculated by dividing the distance traveled by the price from its previous low to its current level by the distance traveled since the initial move.
3. Percentages: Fibonacci retracement is usually calculated between 20% and 80% of the total move, while Fibonacci extension is calculated between 26.5% and 73.5% of the total move.
4. Use in Trading Strategies: Fibonacci retracement and extension can be used in a variety of trading strategies, such as entry, exit, and position management. Retracement is more commonly used for entry, while extension is more often used for exit or position management.
Fibonacci retracement and extension are two important indicators within the Fibonacci sequence, each with its unique purpose and application in trading and investment strategies. Understanding the key differences between these indicators can help you make more informed decisions and optimize your trading or investment activities.