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. 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 >>
  3. Why are Fibonacci Clusters important in a Fibonacci Retracement Strategy?

    Find out how Fibonacci clusters form and how they can be used by traders and analysts to identify support and resistance ... Read Answer >>
  4. 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 >>
  5. 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 >>
  6. How do I use Fibonacci Retracements to create a forex trading strategy?

    Learn how to use Fibonacci retracements as part of an overall forex trading strategy. Fibonacci levels are carefully watched ... Read Answer >>
Related Articles
  1. Trading

    Strategies For Trading Fibonacci Retracements

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

    Taking The Magic Out Of Fibonacci Numbers

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

    Top 4 Fibonacci Retracement Mistakes To Avoid

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

    Fibonacci And The Golden Ratio

    Discover how this amazing ratio, revealed in countless proportions throughout nature, applies to the financial markets.
  5. Trading

    3 Fibonacci Trades For Late Summer

    Fibonacci retracement analysis organizes chaotic price action, highlighting hidden buying and selling opportunities.
  6. Trading

    Using a Fibonacci Retracement

    The Fibonacci retracement is the potential retracement of a financial asset's original move in price.
  7. Trading

    Support And Resistance Basics

    Understanding the concept of Support and Resistance in trading can drastically improve your short-term investing strategy.
  8. Trading

    The Anatomy Of Trading Breakouts

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

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

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

    Fibonacci: Using Math To Make Right Market Moves

    Use these two original Fibonacci techniques to pinpoint the patterns in stock movements, and the most reliable entry and exit levels.
RELATED TERMS
  1. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support ...
  2. Breakout Trader

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

    A variation of the Fibonacci retracement pattern in which the ...
  4. Fibonacci Time Zones

    An indicator used by technical traders to identify periods in ...
  5. Fibonacci Fan

    A charting technique consisting of three diagonal lines that ...
  6. Fibonacci Clusters

    A tool used in technical analysis that combines various numbers ...
Hot Definitions
  1. Dow Jones Industrial Average - DJIA

    The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange ...
  2. Revolving Credit

    A line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. It is ...
  3. Marginal Utility

    The additional satisfaction a consumer gains from consuming one more unit of a good or service. Marginal utility is an important ...
  4. Contango

    A situation where the futures price of a commodity is above the expected future spot price. Contango refers to a situation ...
  5. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  6. Acid-Test Ratio

    A stringent indicator that indicates whether a firm has sufficient short-term assets to cover its immediate liabilities. ...
Trading Center