Auto Fib Extension is a tool that calculates target price levels following a retracement. Extension levels also indicate potential price reversal areas and show possible price levels after a retracement is completed. These levels are based on the key Fibonacci coefficients and the price movement of the symbol on the chart.
To use the new Auto Fib Extension indicator, use the Indicators button on your chart and find the Auto Fib Extension indicator in the Built-ins tab.
The indicator is written in Pine Script and its source code is accessible. You can access it from the Source code icon to the right of the indicator's name on the chart, or from the Pine Editor, by using the Open button, then clicking on New default built-in script… and Auto Fib Extension.
The concept of Fibonacci extensions is derived from the Fibonacci retracement method. It was developed to determine target price levels following a retracement. It is named after its use of the Fibonacci sequence and is based on the theory that markets often retrace an anticipated portion of a move before continuing in the initial direction.
Fibonacci extensions don't have a specific formula. The extension levels are calculated based on the Fibonacci sequence, and the most common levels are 61.8%, 100%, 161.8%, 200%, and 261.8%. The Trend-Based Fib Extension drawing tool is based on three points set by the trader: the first two points define the trend line, the last one defines the retracement level. After setting the points, horizontal level lines are drawn and the levels identifying potential targets for further price movement are determined based on these lines.
With the new Auto Fib Extension indicator, you do not need to set points manually, as is required with the Trend-Based Fib Extension drawing tool. The algorithm will select the points and draw the levels automatically.
Points 1 and 2 in this image show the direction of the trend line. Points 2 and 3 show the retracement level. Possible levels which the price may reach are shown by the indicator lines: the most commonly used take profit lines are 0.618, 1.0 and 1.618.
The minimum number of bars that will be taken into account when calculating the indicator.
Allows extending lines on the chart to the left or right.
Allows you to reverse the order of the lines and the direction the indicator calculates.
Displays price values.
Displays level values.
The color of each level line.
The format used for displaying values. It can use either regular numerical values (the Values option) or Percent format.
To sum up, this has been a long awaited indicator that we are happy to add to our ever-growing list of technical analysis tools. Auto Fib Extension can be very useful in determining target levels after a retracement. Most technical indicators look backward by analyzing historical prices; Fibonacci extensions help identify possible price levels in the future.