by Brandon Wendell, Online Trading Academy

Online Trading Academy Article of the Week

Last week we examined a couple of decision support tools known as the Fibonacci retracements and extensions. In this article, we will look at another tool that can help predict the timing of the reversals in price, the Fibonacci time extension tool.

Traders must remember that these tools are meant to support your trading decisions that are based on trading the core strategy of supply and demand. The tools should never be used alone to make your decision to enter or exit a position.

The Fibonacci time extension tool is not as accurate as the Fibonacci retracements or projections but can be used to warn of possible reversals in the current trend. The time extension tool measures the length of time that a particular price impulse has taken to form and projects several ratios of that distance into the future.

Once price begins to correct from an impulse in the trend you can select the time extension tool on your trading platform. You must then start the measurement from the candle that began the impulse. The end of the measurement is the candle that marked the end of the impulse.

There are three main ratios that are used for this projection: 0.618, 1.0, and 1.618. This projection should foretell of a change in the trend, although it will not tell the exact direction of the change. Whatever direction you are in at the time should reverse when you reach the time projection. In the case of the US Dollar, they not only marked the start of an additional correction but also the beginning of the next two impulses when price changed trend.

The strongest signals from the Fibonacci indicators come when they confirm each other. In the following chart of IWM, the correction ended at a Fibonacci retracement. But the new impulse began at the intersection of the retracement and the time extension. That impulse eventually corrected at the next time extension point.