Fibonacci extensions are, as the name indicates, not a separate Fibonacci Studies in their own right, but rather a way to increase the utility of Fibonacci retracements over time. Fibonacci extensions are created by first generating a Fibonacci retracement chart for a market. This is done by drawing a vertical line from a top to a bottom and then crossing the vertical with horizontal lines, each drawn through points determined by taking Fibonacci-significant percentages of the initial vertical’s length (38.2%, 50% and 61.8% of the vertical’s length being the most common values used.) Once a basic Fibonacci retracement is created, a Fibonacci extension can be created by extending the vertical and drawing additional horizontal lines through it at higher or lower price levels, corresponding to greater Fibonacci-significant percentages: 161.8%, 261.8%, or any percentage derived by multiplying a previous percentage by the golden ratio of 1.618. Once a Fibonacci level is met and broken through, that level becomes support, with the following Fibonacci level becoming resistance.
Fibonacci extensions are used to outline future support and resistance levels for a market once price levels exceed the initial retracement resistance or support level of 100% of the original vertical’s height. Fibonacci extensions are thus not just a method of assessing how much the market will recover from a major price adjustment, but rather a long-term method of determining the support and resistance levels of the market once price levels have broken the original support or resistance and begun moving along a new overall trend.