Using the Trend-Based Fib Extension Tool

7 may 2021

The Fibonacci ratios are widely used among traders to help identify potential areas of reversal in the movement of price action.

The Trend-based Fibonacci Extension tool utilizes three points on a previously identified trend in order to draw the Fib ratios on the chart.

In the chart above, price was rejected twice at the ~$35.50 level, forming a double top which is a fairly strong reversal pattern. To help identify potential areas of support and resistance we have drawn a Trend-Based Fib Extension.

Using the double top patterns High, Low, and High as the three points for the Trend-Based Fib Extension, the Fibonacci ratios are drawn on the chart.

In this example, you can see that price action respected these levels very well until finding strong support at a potential bottom that corresponds with the 200% extension level.

But, notice the region in the yellow box on this chart. There seems to be no identified areas where the Fibonacci ratios show support or resistance.

While retrospectively we can tell that the area of support found at ~ $12 (141.4%) in mid-November 2017 did not produce a new bull market. At the time there was a potential reversal at that region resulting in higher highs and therefore we could have pulled a NEW Trend-Based Fib Extension as shown below.



As the new Trend-Based Fib Extension is identifying areas of a new uptrend, we see that these ares are shown in a way that they were not in the previously drawn Trend-Based Fib Extension.

However, price was rejected at the 61.8% level and continued downward until the 0% extension level was broken, thus invalidating this Trend-Based Fib Extension.

While the upward price trend did not continue, there was a local high that was made and thus could be utilized to create another Trend-Based Fib Extension to further identify areas of reversal for the continuing downtrend as shown below.



Looking at this newly created Trend-Based Fib Extension, we see that the areas moving down to the 78.6% extension level are very well respected, at which time the price found support, creating a triple bottom reversal pattern.

It is interesting to note that the 78.6% extension on this Trend-Based Fib Extension pull is at $1.82, and the 200% extension level from our first Trend-Based Fib Extension pull was at $1.95, a mere $0.13 difference in price.

This area where the two levels of a Trend-Based Fib Extension or Retracement group together is know as a Fib cluster and indicates areas of strong support or resistance.

With price forming a triple bottom and reversing from this level, is it possible that this is the bottom of the downtrend?

Could a new Trend-Based Fib Extension now be pulled from a new Low/High/Low to identify potential areas of support and resistance?

Give it a try and see what you find!