1. You always have to start from
higher time frame extensions (monthly quarterly), just to be sure that
they are not going to have impact on your potential trade. Because it may
happen that even trading on hourly chart, the market can reach some monthly
extension target and you will see support or resistance there, where you
absolutely do not expect to see it. It would cost you a lot of money and
heartache. Actually this rule
must be applied not only to extensions but to overall market analysis – always
start from higher time frame, to understand where you are in a big picture;
2. Try to recognize, where the thrust is (AB move) and where a retracement from these thrust is (BC move). Then you easily can estimate whole extension;
3. “C” point should always stand inside AB swing. And, it always is the lowest/highest point, from which up/down extension move (CD) has started in continuation of initial AB swing;
4. It is better, if the BC move is well recognizable and reaches at least 0.382 retracement level from AB swing. But sometimes could happen that the B point and C point will be the two nearest candles;
5. As a rule, the latest extension is important (as on chart #5) and the major extension (as on your chart #4);
6. If you have many different extensions – as we are on this GBP/USD weekly chart, you should apply those that are suitable to your potential position. Let’s assume that you’ve bought in C point at 1.5335. Using the most recent extension (chart 5) is more reliable, than those that on chart 4 or 6. Because they are forming during much longer time, hence to hit their targets it’s also a lot of time will needed. But extension on chart #5 has 1.0 target much closer. Besides, even if you have chosen extension from chart #4 or #6 and intend to hold position for a long time, you should keep in mind that extension on chart #5 will show you strong resistance or even reversal. May be better to exit and then reenter on some retracement?
7. Much better if AB is thrust move, than some sideway almost flat move.
And the last one for today – as retracement levels could be used as profit objectives, as extensions could be used for estimation areas of support and resistance. Only for that purposes it allows that “C” point” stands slightly outside AB swing. Here is how it looks like:
2. Try to recognize, where the thrust is (AB move) and where a retracement from these thrust is (BC move). Then you easily can estimate whole extension;
3. “C” point should always stand inside AB swing. And, it always is the lowest/highest point, from which up/down extension move (CD) has started in continuation of initial AB swing;
4. It is better, if the BC move is well recognizable and reaches at least 0.382 retracement level from AB swing. But sometimes could happen that the B point and C point will be the two nearest candles;
5. As a rule, the latest extension is important (as on chart #5) and the major extension (as on your chart #4);
6. If you have many different extensions – as we are on this GBP/USD weekly chart, you should apply those that are suitable to your potential position. Let’s assume that you’ve bought in C point at 1.5335. Using the most recent extension (chart 5) is more reliable, than those that on chart 4 or 6. Because they are forming during much longer time, hence to hit their targets it’s also a lot of time will needed. But extension on chart #5 has 1.0 target much closer. Besides, even if you have chosen extension from chart #4 or #6 and intend to hold position for a long time, you should keep in mind that extension on chart #5 will show you strong resistance or even reversal. May be better to exit and then reenter on some retracement?
7. Much better if AB is thrust move, than some sideway almost flat move.
And the last one for today – as retracement levels could be used as profit objectives, as extensions could be used for estimation areas of support and resistance. Only for that purposes it allows that “C” point” stands slightly outside AB swing. Here is how it looks like:
Chart #7 GBP/USD Weekly
In fact, this is very important chart that contains almost all important rules that we’ve pointed out today. Let’s move through it from left to right:
1. First, here you can see an importance of major AB swing – look how the market reacts on all targets – 1.0; 1.272 and 1.618. Furthermore – 1.618 target with outstanding accuracy shows the reverse on top. This top is also has been confirmed by shooting star that later has become a part of evening star pattern;
3. Here you can see, how Fib extension tool could be applied for estimation of support area. See the last ABC pattern – C point stands a bit outside of AB swing. And 1.618 extension target supports the market. This is an Agreement by the way with 0.382 Fib retracement (support) level!
