Can't see the trend? No profit target? The Fibonacci expansion line breaks the situation in one move!

1. What is the Fibonacci Trend Extension Line?

The Fibonacci sequence is a vast treasure trove of knowledge that can be applied to many fields. In technical analysis, based on the characteristics of the Fibonacci sequence, a series of Fibonacci tools have been created to help investors gain more market insights.

The Fibonacci toolbox includes the most familiar Fibonacci Retracement Line, also known as the "Golden Ratio Line." The Golden Ratio Line is mainly used to predict when the market will adjust.

Now, the question arises: where will the market go after the adjustment ends? At this time, another gem from the Fibonacci toolbox—the Fibonacci Trend Extension Line—can come in handy.

The Fibonacci Trend Extension Line and the Fibonacci Retracement Line are similar in that both use Fibonacci ratios (such as 38.2% and 61.8%) to analyze potential Resistance and support levels; the main difference lies in their application at different stages of market development. As the name implies, the Fibonacci Retracement Line is used to predict retracement points, while the Fibonacci Trend Extension Line is used to predict the further expansion space of the original trend after the retracement ends.

Therefore, in practice, investors can use the Fibonacci Retracement Line and the Fibonacci Trend Extension Line sequentially according to market developments, which will provide deeper insights into market trends.

2. How to Use the Fibonacci Trend Extension Line?

The Fibonacci Trend Extension Line is mainly used to help investors find potential support or Resistance levels, especially when other technical analysis methods are not convenient for discovering certain potential support or Resistance levels, such as when the market sets new highs or lows at certain stages, the unique predictive function of the Fibonacci Trend Extension Line can be utilized.

Deploying Fibonacci extension lines is not complicated; first, identify a clear market turning point, then connect the three price points A, B, and C in sequence.

Taking the upward trend as an example:

• Point A is the starting point of the upward trend, usually a certain phase low point, or located at the bottom position of the market.

• Point B is the starting point of the market pullback, the market begins a partial adjustment from point B.

• Point C is the endpoint of the market pullback, marking the end of the market adjustment and the continuation of the previous trend.

The Fibonacci extension lines have a series of percentage points, these points measure the percentage extension of the market starting from point C, relative to the A-B price trend; some important levels include 38.2%, 50%, 61.8%, and 100%, etc.

Investors can use these points to assess potential Target Prices after the market adjustment ends. If the price breaks through a certain percentage point, then attention can be given to the next level.

It is important to note that the B-C price trend must be less than the A-B price trend. Strictly speaking, the price retracement of B-C relative to A-B should ideally be kept within 61.8%; if it exceeds 61.8%, it may suggest a reversal of the trend, rather than a continuation of the previous trend.

Fibonacci extension lines can also be applied to wave theory. For instance, the price trend from A to B corresponds to wave 1, representing the initial trend; the price trend from B to C corresponds to wave 2, which is a correction of wave 1; wave 3 starts at point C and is often longer than wave 1. Using the Fibonacci extension line, its potential endpoint can be predicted.

3. Case Analysis

Figure 1 shows a strong upward trend followed by some adjustments. In this case, investors deploy the golden ratio line by connecting the starting and ending price points of this trend to better understand the market trend.

Through the golden ratio line, it can be determined that this is a relatively shallow adjustment, as the price retracement is less than 38.2%. Investors may speculate that the market will continue the previous upward trend and has further upward potential.

At this point, Fibonacci extension lines can be used to assess potential resistance levels and set potential target prices.

Figure 2 confirms potential target prices using Fibonacci extension lines and RSI indicators. As shown in the figure, the first price point worth noting is near the 38.2% extension level, and at the same time, the RSI indicator approaches 70, signaling overbought conditions. This indicates that there is likely to be resistance near the 38.2% extension level, which can serve as a potential target price.

The next price point worth paying attention to is near the 50% extension level. Observant investors may notice that when the price approaches the 50% extension level, a "double top pattern" appears on the chart, and the RSI indicator shows a bearish divergence, making the bearish signal quite clear. Therefore, a potential target price can also be set near the 50% extension level.

Finally, it is important to note that as a technical analysis tool, Fibonacci extension lines have many limitations and investors should not rely on them excessively.

One of the main issues is that deploying Fibonacci trend extension lines has a strong subjectivity. Different Analysts draw different starting and ending points, resulting in lines that vary, which leads to confusion in decision-making.

This content discusses technical analysis; other methods, including Fundamental Analysis, may provide different perspectives. The examples provided are for illustrative purposes only and do not reflect expected results.

All investments involve risks, including the potential loss of principal, and there is no guarantee that any investment strategy will be successful.