They are measured from the same initial highs and lows that the retracements are measured, which you said you understand. Depending on what trading platform you use you can figure it out quickly what each level means. In my charting platform for example when I plot a fibb retracement I have an option to check to show me the so called "extensions" and besides the usual 23.6,38.6,50,61.8 retracement levels it will show me the -23.6,-38.2,-50,-61.8 levels in the opposite direction and call them extensions. However different trading platforms have slightly different names and ways of drawing them and such you should figure it out by yourself how is it in yours. As for how traders use them, generally speaking they use them in the attempt to make an idea about the amplitude of the next move if that's what you are asking... and its really not mathematics but 4th grade arithmetic's.
May I suggest you focus your learning on someone that uses Fibs correctly. Such a resource will NOT be free. I will guarantee you that. Fibs are extremely accurate when used correctly. I have recently learned that my use of fibs after 4 years of self taught study was 90% wrong. Not wrong by much, but wrong enough.
While I cannot share with you the details of such Fib application, I can suggest that information on freely available sites is 99% incorrect. And full of half truths and misleading information based on assumptions and incorrect application. Basically junk science.
First off, there are only two important groups of Fibs - retracments and expansions. Everything else is a cute re-definition of an existing concept. Just like Wolfe Waves are of Elliot Waves.
Secondly, the simplest application of a Fib (in either IR or FE mode), is when horizontal S/R lines up with Fib FE or IR. That is it. There is nothing else to it. While this may sound simple, rest assured it is often not. It is also not easy to adapt to. Principally because we are taught to look for difficult answers to difficult problems. The answer most assuredly is that more complicated the market of price action, the more robust your answer should be, to be true. All other ways open themselves up to fragility and error.
IR - internal retracement
FE - Fib expansion.
Here is a simple application from today -
An impulsive push up.
A retrace to S/R from day ago at an existing IR (confluence).
The target is a confluence of an extension and another pre-existing S/R.
There are other things to consider in this mix -
Why would take this long at all, and not short
Where are the stops in this prevailing session (in the absence of news)
And why the length of first move lines up length of 2nd (ab=cd)
What part of the impulse it is.
And why time of day determines the like hood of the CD going to target at all
And why this would fail if there was major news in play
And more importantly, how much size to use, and why the stop on this move was 5ticks with an AIAO entry/exit
Who is getting stopped out at these edges, and why one stop out will lead to a stop out of the other side of the prevailing session.
But these are things that come after you get a grasp of the setup. If you setup is loaded, you can make a lot of mistakes and still win. But if the concept is flawed, Nothing else matters. Logic must prevail. Markets have a logic - just because we cant see it does not mean its does not exist. Let me also say this, what you see on this chart is enough to trade profitably, and all is has is s/r lines and potential ir/fe zones. Qualifying them takes time and expertise, but that is all that is required.
Lastly, FE and IR have a lot of numbers - none of them have meaning unless there is a very good confluence from an uncorrelated event (like S/R line, Volume node, or previous event). By themselves Fibs are just math numbers.
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Last edited by Deucalion; October 21st, 2013 at 05:18 PM.
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