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

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

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

    Taking The Magic Out Of Fibonacci Numbers

    Uncover the history and logic behind this popular trading tool.
  5. Investing

    Interpreting Support And Resistance Zones

    Use of support and resistance zones can be a key to successful trades. Learn how they work and how to use them.
  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

    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.
  8. Investing

    These Stocks Are Sqeezed and Ready Pop (PE, ALK)

    With the price action being compressed in these stocks for some time now, the chance of a breakout is increasing.
  9. Trading

    Watch for These Triangle Breakouts (WY, SU)

    Watch for triangle breakouts in these stocks, which could indicate the trend direction over the next several months.
  10. Trading

    Using Double Tops And Double Bottoms In Currency Trading

    Find out how to apply the two most common price reversal patterns to your trading.
RELATED TERMS
  1. Breakout Trader

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

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

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

    An indicator used by technical traders to identify periods in ...
  5. Volatility Ratio

    A technical indicator used to identify price ranges and breakouts. ...
  6. Resistance (Resistance Level)

    A chart point or range that caps an increase in the level of ...
Hot Definitions
  1. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
  2. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  3. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
  4. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
  5. Buyback

    The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies ...
  6. Tax Refund

    A tax refund is a refund on taxes paid to an individual or household when the actual tax liability is less than the amount ...
Trading Center