Fibonacci Extensions Strategy

We have already released 2 episodes on the Fibonacci tool, and this has been a great success. For this final episode, we are adding 1 more element to make your automated Fibonacci toolkit complete. This final element is the Fibonacci Extension. 
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Disclaimer: Templates are for educational purposes only!

👉 Get the Fibonacci Extension Automation Template → Fibonacci Extension Profectus Template

This template is designed to run on the 1H Timeframe.

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You might also want to watch the full YouTube video on the Fibonacci Extension strategy here to get an in-depth explanation of the pattern.

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Fibonacci recap

You can use the Fibonacci tool to identify strong moves and to find mechanical trading entries based on the Fibonacci ratios. The Fibonacci ratios represent percentages of the move that has been measured, to target where you would like to enter the trade.

Let’s look at an example. If you want to build a system based on trend continuations or breakouts, the Fibonacci method is a great way to find entries with a high risk-to-reward ratio. You let the system identify the move by using only 5 candlesticks. For a bullish move, the low of the most recent candle (candle ID 1) has to be higher than the low of 5 candles before that (candle ID 5). And vice versa for a bearish move. 

The next step is to measure the strength of the move by comparing it with the current market volatility, using the ATR indicator. If the size of the move is bigger than the current market ATR over that same period, we can say that the move is impulsive. 

In the final step, we measure the start and the end of the move and plot the Fibonacci levels as percentages of the move. The .618 Fib level is plotted at 61.8% of the move, meaning that price needs to pull back more than half of the move (61.8% to be exact) to reach the .618 Fib retracement level. 

You can read the full Fibonacci Retracement strategy article here for the full explanation of Fibonacci retracements, and how to build them in Profectus AI

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The Fibonacci Extension

The final element of the Fibonacci series is the addition of the extension. The extension is very simply an extension of the move, based on a percentage added. The Fibonacci extension is a popular method for identifying mechanical targets or take profit levels. In general, this is the beauty of the whole automated Fibonacci strategy. It gives you:

• Mechanical entry levels (the retracement levels, such as .618)
• Mechanical stop loss levels (deeper retracement levels such as .786 or the start of the move)
• Mechanical take profit levels (the extension levels, such as 1.27)

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The Fibonacci extension is calculated by adding a percentage on top of the move, instead of taking a percentage as part of the move. The popular extension levels are 1.272 and 1.618. 

It means that we’re multiplying the size of the move by those ratios to get the extension levels. For example, if the move is bullish and is measured between 1.1150 and 1.1200 (50 pips), the 1.272 extension level is located at 1.1214. 

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Fibonacci Extension Strategy rules

Let’s first look at an example of a trade from the Fibonacci Extension strategy.

The rules for this trading strategy are the following:

1. Start by measuring a strong impulsive move using the most recent 5 candlesticks. If the low of the previous candle (Candle ID 1) is lower than the low of 5 candles back (Candle ID 5), you have identified a bearish move.
2. Save the low of Candle ID 5 as the high, save the low of Candle ID 1 as the low
3. Calculate if the move is impulsive by comparing the distance between the high and the low against the current ATR value multiplied by 5. If the distance of the move is greater than the volatility threshold, we can say the move is impulsive
4. Calculate the Fibonacci retracements of the move. Also, calculate the .272 extension by multiplying the distance of the move by 1.272 and adding this to the low of the move. 
5. If there are no open trades, place a buy pending order on the .618 Fibonacci retracement level, with a stop loss on the low of the move and a take profit at the .272 extension.
6. If an order is not triggered, it will be automatically removed after 4 hours, and the system will look for new opportunities.

Automating Fibonacci Extensions in Profectus AI

For this section, let me walk you through the system for sell trades only. The buy side logic has already been discussed in the previous episode which I have already linked to at the start of article. 

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1. Initiate the variables. We start by putting the following variables in the Variables list. All are numbers and have a value of 0 by default:
   
   high
   low
   highlow
   highlowfib1
   highlowfib2
   highlowfib3
   fib1
   fib2
   fib3
   fib4
   fibext
   impulse
   ATRmove
   

2. Run per candle. We start the EA by checking all the rules once per candle
   
   
3. Trade rule for identifying a bullish move. Put a trade rule block with the following rule:
   
   Candle low, Candle ID 5 < Candle low, Candle ID 1
   
   For continuing with the sell side of this strategy, we simply take the false output of this block and connect the next block to this false output.
   
   
4.  Assign the move high and low to variables. Use 2 modify variable blocks to assign the high and low to the variables high and low.
   
   high = Candle High, Candle ID 5
   low = Candle Low, Candle ID 1
   
   
5. Identify the Impulse using Formula block. We use 2 simple calculations for this
   
   Impulse = high - low
   
   ATRmove = Indicator Average True Range (period 14) * 5
   
   
6. Calculating the Fibs using 2 formula blocks. Formula block 1:
   
   Highlow = high - low
   
   Highlowfib1 = highlow * 0.382Highlowfib2 = highlow * 0.618
   
   Highlowfib3 = highlow * 0.786
   
   Highlowfib4 = highlow * 0.27
   
   
7. Confirm bullish move again. We run another check to see if the move was bearish or bullish to identify the next steps. Put a trade rule block with the following rule:
   
   Candle low, Candle ID 5 < Candle low, Candle ID 1
   
   For continuing with the sell side of this strategy, we simply take the false output of this block and connect the next block to this false output. 

8. Assign the Fibonacci Ratios. We use another formula block and connect this to the false output of the previous block. We put the following formulas in:
   
   Fib1 = low + highlowfib1
   Fib2 = low + highlowfib2
   Fib3 = low + highlowfib3
   Fibext = low - highlowfib4
   
   
9. Check if no open trades. Count trades block with 0 orders and 0 open trades
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10. Confirm Impulsive Move. Trade rule block checking if:
    
    Impulse > ATRmove
    
    
11. Sell pending order.
    
    Open price: Custom price level, fib2
    Stop loss: Custom price level, high
    Take Profit: Custom price level, fibext
    Expiration: 4 hours
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Get Access to the Fibonacci Extension Strategy Template

Want to see how the Fibonacci Extension Strategy works when fully automated?

Access an enhanced automation template used to turn this trading concept into a deployable MQ5 trading bot inside Profectus. This template has a trade execution module included, so you can start testing it right away!

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Disclaimer: Templates are for educational purposes only!

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👉 Get the Fibonacci Extension Automation Template → Fibonacci Extension Profectus Template

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This template is designed to run on the 1H Timeframe.

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How to run the Strategy in Metatrader 5?

We have written a full article to get you started in Metatrader 5 and how you can run any automated strategy, such as the Fibonacci Retracement strategy, as an Expert Advisor yourself.

Read the full guide here to run your first trading bot in MT5

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