Through the use of expansions studies, we will be calculating key areas of price support and resistance.
Price expansions are similar to projections with one small difference. Instead of measuring swing X:A and projecting it from B, we project the values from А. В is not used in this study. Basically, expansions measuring swing X:A „expand“ that swing further in the direction price is headed using the following Fibonacci ratios: .618, 1.00, and 1.618. These price levels will be labeled as (Exp) on the charts. To calculate an expansion only two points must be established (X, A). For illustration purposes, let's say X is 50 and A is 45 in Figure 4.1.
First, let's calculate what the range of X to A is:
Price @ A: $45
Price @ X: $50
Range = $5.00
Next let's multiply this range by each Fibonacci ratio:
Ratio Points
0.618 $ 3.09
1.000 $ 5.00
1.618 $ 8.09
Finally, take the number from each ratio and subtract it from A, which is $35.00. This will provide you with Fibonacci projection levels.
So, if I were to ask you for the 0.618 expansion of swing X;A, the answer would be $41.91. The price levels in the table above represent Fibonacci price support decisions. The exact same analysis can be done for Figure 4.2 to calculate projection levels acting as resistance. In Figure 4.2, X is $30, and A is $40. This time instead of subtracting from A we would add to A, to determine price resistance levels:
Expansions are a „confirming“ Fibonacci study. This simply means that the other three studies — retracements, extensions, and projections — should be the first price studies applied to a chart. Then utilize this price study to confirm a potential price support or resistance zone.
