Fibonacci is useful for measuring the distance of pullbacks, retracements and extensions of price from previous lows or highs. The fibonacci levels indicate mathematically common points of support or resistance away from the previous highs or lows. These points add extra levels of support and resistance that can be used to find points of reversal – they are especially strong levels when they coincide with already drawn zones.
The image above shows UJ on the m15 chart. Here, a major fibonacci level is in a major resistance level so when price stalls and forms a rejection wick and bearish pin bar at the 61.8 retracement, this gives an indication of a reversal. Because price reacts in this way at a pre drawn resistance zone and a major fibonacci point, the resistance is very strong. It is likely that both people who use fibonacci as resistance and zones as resistance will take sells, which they evidently did in this example as the price dropped down to the support zone.
The image below shows how price reversed at 61.8 reversal, even though it was not at a major zone. As a result, you can see that fibonacci levels can also be used as profit targets. In the CADJPY example below, price had formed a higher high, suggesting bullish strength is greater than bearish at this time. As a result, it is unlikely that price will retrace all the way to the previous low because bulls are more in control. This means that fibonacci can be used to show points that price may retrace to. This type of fibonacci is called fibonacci retracements and they are best for measuring pullbacks.
Made by: J.E.Forex
On the other hand, fibonacci extensions are used to measure the distance of breakouts, as you can see below.
Here, as the price EXTENDS past the previous high, the extension levels of fibonacci are useful indicators of when bullish pressure may slow. As you can see from this example on the h1 UJ, price found resistance at the 161.8 fibonacci extension that also happened to be within the next zone.
Both fibonacci extensions and retracements are drawn from left to right on the chart, from the previous high to low or low to high, depending on trend, and drawn with the same tool on mt4. The difference between them is simply that retracements refer to smaller pullbacks whereas extensions are breaks past the previous high or low.