Fibonacci Extension
Fibonacci extensions project price targets beyond 100% of a measured wave move. You use them to estimate where an advancing wave will terminate, which makes them essential for setting profit targets and identifying potential reversal zones. The most commonly used extension levels are 127.2%, 161.8%, 200%, and 261.8%. To calculate them, you measure the length of a completed wave and project that distance multiplied by the Fibonacci ratio from a relevant pivot point. Wave 3 frequently terminates near the 161.8% extension of Wave 1 measured from the Wave 2 low. Wave 5 often reaches the 100% or 127.2% extension of the distance from the start of Wave 1 to the end of Wave 3, measured from the Wave 4 low. Wave C targets can be projected similarly from the Wave A distance. When a Fibonacci extension level coincides with a channel boundary or a support/resistance zone from a higher timeframe, the probability of a reversal at that level increases significantly. Use these levels as target zones rather than exact numbers, typically looking at a cluster within 1-2% of the calculated level.
Wave 1 of an impulse on gold runs from $1,800 to $1,900 (100 points). Wave 2 retraces to $1,850. You project Wave 3 targets: 161.8% extension gives $1,850 + (100 x 1.618) = $2,012. Gold rallies to $2,008 and reverses, landing within 0.2% of the Fibonacci extension target.