A:

Determining where the price of an asset will stop once it has created a new high is one of the most difficult tasks for any trader. There is no magic way to determine what price an asset is likely to reach, but technical traders have developed a number of methods that can at least give you a fairly good estimate.

Fibonacci Extension
This tool is used by technical traders to forecast potential areas of support or resistance. First plot the high and the low, in this case $45 and $36. This 9 dollar range is now the 100% to 0% range. Extensions consist of all Fibonacci retracement levels that exceed the standard 100% level. Fibonacci extensions predict that a move will advance until it reaches the 161.8% or 261.8% Fibonacci resistance levels and then reverse its direction. As you can see in Figure 1, once the price breaks above $45 (100%), a trader will set his or her initial target at $50 (161.8% of our $9 range) above the starting point of $36, and the secondary target at $59 (261.8%)

Extension.gif
Figure 1

Chart patterns
One of the most common methods of setting a target price is achieved by first identifying a technical chart pattern. After the pattern is identified, price targets can be set by measuring the height of the pattern and then by adding it to (or subtracting it from) the breakout price. For example, as you can see in Figure 2, the height of the ascending triangle is added to the breakout price to determine a potential area of future resistance.

pricetarget.gif
Figure 2

As you know, nothing is guaranteed in the financial markets and there is no magic way to determine future resistance. The tools mentioned above may give you a better idea of where to set price targets, but don't solely rely on these - they may not always work.

To learn more, see Fibonacci And The Golden Ratio and Trading On Support.

RELATED FAQS
  1. How can a swing trader use a Fibonacci retracement?

    Learn how swing traders can use Fibonacci retracements to identify areas of support and resistance, as well as entry and ... Read Answer >>
  2. What are some of the more common Fibonacci retracements?

    Examine the basic Fibonacci retracement levels, and learn how key Fibonacci levels are used by traders to identify potential ... Read Answer >>
  3. Where do I place my target when the price of a stock breaks out of a technical chart ...

    Technical chart patterns such as ascending triangles, head and shoulders and double bottoms have rapidly grown in popularity ... Read Answer >>
  4. What is a common strategy traders implement when using Fibonacci Retracements?

    Learn some of the most common trading strategies that traders use in relation to the key support and resistance Fibonacci ... Read Answer >>
  5. Why is the Fibonacci Retracement important for traders and analysts?

    Find out why traders and analysts in financial markets use Fibonacci retracement to help identify support and resistance ... Read Answer >>
  6. What are the best ways to identify Retracements on a stock?

    Read about three of the most common methods for identifying retracement levels on a stock's price chart, including the controversial ... Read Answer >>
Related Articles
  1. Trading

    Advanced Fibonacci Applications

    Extensions, clusters, channels and more! Discover new ways to put the "golden ratio" to work.
  2. Trading

    Strategies For Trading Fibonacci Retracements

    Investopedia explains Fibonacci retracements--based on the elegant "golden" ratio--and how the levels are derived.
  3. Trading

    The Anatomy Of Trading Breakouts

    We'll walk you through this trading strategy from start to finish.
  4. Trading

    Fours Stocks Breaking Out to the Upside (IBN, WDC)

    These stocks are breaking through chart pattern resistance, signaling another move to the upside.
  5. Investing

    Taking The Magic Out Of Fibonacci Numbers

    Uncover the history and logic behind this popular trading tool.
  6. Trading

    Top 4 Fibonacci Retracement Mistakes To Avoid

    There are common mistakes traders make when applying Fibonacci retracements to foreign exchange markets. Here are four well-known errors to avoid.
  7. Trading

    Top 4 Fibonacci Retracement Mistakes To Avoid

    Using Fibonacci incorrectly can have disastrous consequences. Find out which common moves to avoid.
  8. Trading

    Watch for a New Year Breakout in These Stocks (DHR, FIS)

    The narrowing price patterns in these stocks can't last for long. Watch for a breakout.
  9. Trading

    Day Trading for Beginners

    Interested in day trading but don't know where to start? Here are some common day trading strategies, as well as some day trading tips for beginners.
  10. Trading

    Stocks Nearing Triangle Breakout Levels (TIVO)

    Triangles breakouts can provide a risk-controlled way to participate in the next wave of a stock's trend.
RELATED TERMS
  1. Fibonacci Extensions

    Levels used in Fibonacci retracement to forecast areas of support ...
  2. Breakout Trader

    A type of trader who uses technical analysis to find potential ...
  3. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support ...
  4. Price Target

    1. A projected price level as stated by an investment analyst ...
  5. Breakout

    A price movement through an identified level of support or resistance, ...
  6. Fibonacci Time Zones

    An indicator used by technical traders to identify periods in ...
Hot Definitions
  1. Profitability Index

    An index that attempts to identify the relationship between the costs and benefits of a proposed project through the use ...
  2. Restricted Stock Unit

    Compensation offered by an employer to an employee in the form of company stock. The employee does not receive the stock ...
  3. Operating Ratio

    A ratio that shows the efficiency of a company's management by comparing operating expense to net sales. Calculated as:
  4. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  5. Pro Forma

    A Latin term meaning "for the sake of form". In the investing world, it describes a method of calculating financial results ...
  6. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
Trading Center