A question that is common in the trading world. It is typically asked by trading participants of varying skills and proficiency. Usually it is asked because of their interest in potentially being able to forecast market behavior in advance. Sort of like having a Chrystal ball to the market

Well, without further ado, a Fibonacci Price Projection, also known as Fibonacci Price Extension is a mathematical formula that is applied to the price of an instrument utilizing established Fibonacci ratios for the purpose of forecasting a level that price is expected to react to at some point in the future. Phew. That was a mouth full!

In other words, Fibonacci Price Projection is methods by which a trader can determine a price level in the future where price is expected react to. This reaction can be of four types:

1) Stop and reverse: price is expected to reach the projected level before market forces reverse

2) Stop then continue: price is expected to reach the projected level before market forces are reinforced.

3) Continue then retest: price is expected to reach the price level after passing it.

4) Continue through: price level is expected to fail.

There are several types of Fibonacci Price Projections ranging from the simple to the most exotic, but for the purpose of this article and from a practicality point of view, I will only mention the most applicable projections. The most common Fibonacci Price Projections are:

1) Fibonacci Retracement

2) Fibonacci Expansion

3) Fibonacci Extension

4) Fibonacci Alternate (also known as Fibonacci Parallels)

Each of these expansions has its own unique set of Fibonacci ratios and formula. I have already written a detailed article outlining how to correctly calculate and apply each of these formulas entitled Fibonacci Price Projections: Correct Determination and Application so I won't go into that detail in this article, but I will mention a few important points

Each projection type is used for a specific purpose and failure to recognize that purpose will result in less than ideal outcome in your trading activity. So, what is the purpose of each formula? Well, let me tell you.

Fibonacci Retracement is mainly used to identify price support levels after price has been trending for a while. What is a while? Well, that will depend on your time frame and how you define a trend, but the important part is that you would use Fibonacci Retracement when you have a reason to believe that price has been moving in one direction and is expected to reverse direction. Once you make that determination then you can apply Fibonacci Retracement formula to forecast potential limits to that reversing move before price starts to continue its previous heading.

Fibonacci Expansion, Extension and Alternate serve the same purpose and that is to forecast the potential price level that a trend will end at before weakening or reversing.

Thus, when using Fibonacci Price Projections in complement to each other, you are essentially forecasting future support and resistance levels where each gives you a different piece of information. Fibonacci Expansion, Extension and Alternate will tell you how far the market will go when a trend is established, while Fibonacci Retracement will tell you how far the market will retrace before continuing with the previous trend.

There you have it, a simply, but hopefully informative, mini article on what Fibonacci Price Projections are.

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