By Admiral Markets

Dear traders,

In our previous blog post, I showed you how to use the 1-2-3 Forex pattern. Today, I will demonstrate how to estimate targets using Fibonacci Expansion that comes with our MetaTrader 4 Supreme Edition trading package.

Fibonacci Expansion

Fibonacci Expansion is a default tool available in MetaTrader, which is also crucial for price action target. This article will introduce the essential Fibonacci Expansion levels that you might want to use with 1-2-3 pattern trading strategies. To be able to use the Fibonacci Expansion tool properly, I recommend you to watch the video below.

Fibonacci Expansion Custom Levels

In order to add custom levels to the Fibonacci Expansion tool, you first need to select the tool from the drop-down menu in MetaTrader 4. This is how you do it:

Source: AM MT4,GBP/USD H1 Chart, July 5, 2:20 Platform Time

Once you have selected the tool in Properties, add the following levels:

1. FE 61.8
2. FE 100.0
3. FE 138.2
4. FE 150
5. FE 161.8
6. FE 200

Please enter some of these levels manually within the indicator properties.

Source: AM MT4,GBP/USD H1 Chart, July 5, 2:30 Platform Time

The characteristics of these levels are important for our price analysis and will add up to 1-2-3 pattern trading.

Fibonacci Expansion 61.8

This is the first important level of the tool. It doesn’t usually act as a strong support or resistance when the price approaches it directly, but rather when the 61.8 support or resistance had already been broken (backward approach). It then transforms into a strong S/R level.

Fibonacci Expansion 100.0

This is considered to be a weak support or resistance level. But if the 1-2-3 pattern point 3 equals or is close to 61.8 of 1-2 retracement, FE 100 should be a strong S/R level.

Fibonacci Expansion 138.2

This is a level similar to 61.8 FE, with very similar characteristics.

Fibonacci Expansion 150

A very strong S/R level, usually strong for USD crosses, where the USD is the base currency. (e.g., USD/CHF, USD/JPY, USD/CAD, USD/SGD, etc.). It is also a strong level for EUR based crosses, where the EUR is the base currency (e.g., EUR/USD, EUR/GBP, EUR/JPY etc.).

Fibonacci Expansion 161.8

A very strong S/R level that possibly marks the end of correction.

Fibonacci Expansion 200

Possibly the strongest S/R level that marks the end of correction, price reversal, and change of the trend.

How to Place Fibonacci Expansion Targets

Simply add Fibonacci Expansion to the 1-2-3 pattern that has been formed to estimate possible price projection targets. The only correct way to do it is shown in the following example.

Source: NZD/JPY Chart, AM MT4, June 20, 15:15 Platform Time

1. Identify the 1-2-3 pattern;
2. Place Fibonacci Expansion;
3. When the price breaks point 2, take the trade and follow the price to one of the important Fibonacci Expansion S/R levels.

Source: AM MT4,GBP/JPY H1 Chart, July 5, 2:50 Platform Time

Stop-Loss Placement

Stop-losses are usually placed below point 3 of the 1-2-3 chart pattern for long trades and above point 3 for short trades. However, if a trader wants to be slightly more conservative with a trade, they might opt to place a protective stop above or below point 1 of the pattern.

Final Words

As always, the single most important thing out of all the things that matter in trading is proper money management. Try to prioritise your setups and do not use your capital for chasing pips where they simply do not exist. Reserve your capital for proper trade setups with the 1-2-3 reversal pattern using low risk and proper targets. 1:2 Risk:Reward is a good choice, but protect your trade with a profit stop if you are an intraday trader.

If you need any question answered, please ask in the comment section below.

Cheers and safe trading,

Nenad

Article by Admiral Markets

Source: How to Pick Targets Using 1-2-3 Patterns

Admiral Markets is a leading online provider, offering trading with Forex and CFDs on stocks, indices, precious metals and energy.