If you’re looking to maximize your trading strategy, knowing how to use Fibonacci extensions on Thinkorswim can be very rewarding. Traders who know Fibonacci extensions have the ability to identify potential price targets beyond the standard Fibonacci retracements, making them a crucial tool for technical analysis.

In this guide, you will learn how to effectively use Fibonacci extensions on Thinkorswim, including how to set them up, interpret them, and apply them in your trading decisions. The aim is to ensure that you have a well-rounded understanding of the topic.

What Are Fibonacci Extensions?

Fibonacci extensions are price levels that traders use to predict where an asset’s price might move following a retracement or pullback. These levels go beyond the traditional retracement levels and provide targets where the price may continue its trend. 

The most commonly used Fibonacci extension levels are 127.2%, 161.8% (Golden Ratio), 200%, 261.8% and 423.6%. These levels are derived from the Fibonacci sequence and are widely respected by traders due to their frequent occurrence in market trends.

Why Use Fibonacci Extensions on Thinkorswim?

Thinkorswim, a powerful trading platform by TD Ameritrade, offers built-in Fibonacci tools that allow traders to set extension levels accurately. Using Fibonacci extensions in Thinkorswim enables you to:

• Identify potential price targets after a breakout
• Determine areas of resistance and support
• Improve risk management by setting stop losses and take profits
• Enhance overall trading strategy with precise entry and exit points

How to Set Up Fibonacci Extensions on Thinkorswim

The various ways to set up Fibonacci Extensions on Thinkorswim are:

1. Open the Thinkorswim Trading Platform

Ensure that you are logged into your Thinkorswim account and have your chart open for the asset you want to analyze.

2. Select the Fibonacci Extension Tool

1. Click on the Drawings menu at the top of your chart.
2. Choose Drawing Tools and select Fibonacci Extensions (also called Fibonacci Projections in some versions).

3.  Identify Key Swing Points

To correctly apply Fibonacci extensions, you need to:

• Identify a major low (starting point of the move)
• Identify a major high (peak of the move)
• Identify the retracement point (the point where the price pulls back before continuing in the original trend direction)

4. Draw the Fibonacci Extension Levels

1. Click on the swing low and drag the tool to the swing high.
2. Extend it down to the retracement level where the price has pulled back.
3. The extension levels will now appear on your chart as horizontal lines.

5. Customize Fibonacci Extension Levels 

• Right-click on the extension lines and select Edit Properties.
• Add or remove extension levels based on your trading strategy.
• Customize colors for better visualization.

How to Interpret Fibonacci Extensions in Thinkorswim

There are various ways to use Fibonacci Extensions in Thinkorswim platform. They are:

1. Using Fibonacci Extensions for Take Profit Targets

Once the price breaks past the previous high or low, Fibonacci extension levels act as potential targets. For instance:

• If the price moves past the 100% level, traders often set their take profit at 127.2% or 161.8%.
• If the price extends beyond 161.8%, the next targets are 200% and 261.8%.

2. Using Fibonacci Extensions for Stop-Loss Placement

You can also use Fibonacci extensions to set stop-loss levels:

• If you enter a trade near the 100% level, consider setting a stop-loss below the retracement level.
• If the price reverses before reaching an extension target, consider exiting the trade.

3. Confirming Fibonacci Extensions with Other Indicators

For better accuracy, use Fibonacci extensions alongside:

• Moving Averages to identify trend direction.
• RSI (Relative Strength Index) to detect overbought or oversold conditions.
• Volume Analysis to confirm breakouts.

Applying Fibonacci Extensions in a Trade

1. A very good Example of Applying Fib Extensions is in Bullish Fibonacci Extension Setup

Imagine you’re trading Apple (AAPL) on Thinkorswim, and you notice the following price action:

• Swing low at $150
• Swing high at $170
• Retracement back to $160

Using Fibonacci extensions:

• 127.2% extension = $180 (First target)
• 161.8% extension = $190 (Second target)

If Apple breaks above $170, these levels serve as potential take profit points.

2. Another Example is found in Bearish Fibonacci Extension Setup

For a bearish trade, let’s say:

• Swing high at $200
• Swing low at $180
• Retracement back to $190

Using Fibonacci extensions:

• 127.2% extension = $170 (First target)
• 161.8% extension = $160 (Second target)

This means that if the stock price breaks below $180, it could reach the extension levels.

Best Trading Strategies Using Fibonacci Extensions on ThinkorSwim

Here are two powerful strategies for using Fibonacci extensions in ThinkorSwim.

A. Fibonacci Trend-Following Strategy

1. Identify an uptrend or downtrend.
2. Draw Fibonacci extensions after a retracement.
3. Enter the trade at the 61.8% or 78.6% retracement level.
4. Take profits at 127.2%, 161.8%, or 200% extension levels.

B. Fibonacci Breakout Strategy

1. Identify a breakout above a key resistance level.
2. Use Fibonacci extensions to predict the next price target.
3. Enter after confirmation of the breakout.
4. Set stop-loss below the breakout zone and target 161.8% or 200% levels.

Common Mistakes Traders Make with Fibonacci Extensions

While Fibonacci extensions are powerful, many traders make mistakes when using them. Here are the most common errors and how to avoid them.

A. Using the Wrong Points for Drawing Extensions

• Always choose the correct swing high and swing low for accurate levels.
• A wrong selection can lead to false signals and missed opportunities.

B. Ignoring Market Conditions

• Fibonacci extensions work best in strong trending markets.
• Avoid using them in sideways or choppy markets where price action is unclear.

C. Not Using Other Confirmation Indicators

• Never rely only on Fibonacci extensions.
• Combine them with volume analysis, trendlines, and price action for better accuracy.

Conclusion

In summary, mastering Fibonacci extensions on Thinkorswim can significantly improve your trading accuracy. By identifying potential price targets beyond standard retracements, Fibonacci extensions help traders make informed decisions, whether in bullish or bearish markets.

To use them effectively, always select the right swing points, combine extensions with other technical indicators, and avoid common mistakes like misidentifying trends.

With consistent practice and analysis, Fibonacci extensions can become a powerful addition to your trading strategy.

Frequently Asked Questions (FAQs)

What is the difference between Fibonacci retracements and Fibonacci extensions?

• Fibonacci retracements measure potential pullback levels, while Fibonacci extensions project where price movements may extend beyond previous highs or lows.

Can I use Fibonacci extensions for day trading?

• Yes, Fibonacci extensions work well for day trading, especially on lower time frames like 5-minute or 15-minute charts.

How do I adjust Fibonacci extension settings in Thinkorswim?

• Right-click on the extension levels, select Edit Properties, and modify the percentages or colors as needed.

Are Fibonacci extensions accurate?

• While no indicator is 100% accurate, Fibonacci extensions provide high-probability price targets when combined with other analysis tools.

Do professional traders use Fibonacci extensions?

• Yes, many professional traders use Fibonacci extensions to identify price targets and set stop-loss orders.