Here in this section, we will learn about 'Fibonacci Projections' that are somewhat similar to what we learned in our earlier unit of Fibonacci extension. Both are used to decide on a price target.
Fibonacci projections are mainly used to get the possible target levels of an ongoing uptrend or downtrend. It is drawn by joining three points unlike Fibonacci Retracement which has just two points- by joining the lowest and the highest points of a pre-defined.
In order to draw the Fibonacci projections for a stock in an uptrend, we need 3 points:
Point A: Swing Low - that is the point from which the actual trend started.
Pont B: Swing High - the point at which price started to retrace.
Point C: Low of the ongoing price correction.
The movement of the price from swing low (point A) to swing high (point B) is known as the first leg. The retracement from point B (Swing High) to point C (low of correction) is known as the second leg. We can plot Fibonacci projections connecting these three points . This will give an indication of the third leg, and the possible area till which price can move to.
How to use Fibonacci Projections?
Fibonacci projections provide potential good levels to book profits. The important Fibonacci projections levels to watch out for are 61.8%, 100%, 161.8%, 200%, and 261.8%.
Fibonacci projections for uptrend:
Fibonacci projections for downtrend:
1. The second leg of the price movement should be a corrective price movement of the ongoing movement. The trader must make sure the trend has not reversed by the use of other technical parameters.
2. The Fibonacci projections are not necessarily the levels from which the price might retrace. A price may move beyond the projected levels to the next level before it starts to correct. So, it is important to always support our analysis with other technical indicators and price action strategies.