Price extensions are exuberant price movements that result from runways markets, opening gaps, or limit moves, up or down, at high volatility. Most extensions occur when unexpected news, such as weather information, crop reports, or interest rate announcements by the Banks, reverse major market trends within seconds.
When news runs counter to investor’s expectations, market situations emerge with strong trading potential. however, investors can only take advantage of these situations if they follow sensible, definitive rules in carrying out analysis. Extensive market moves can be very dangerous for investors who get caught by surprise with a wrong position in the marketplace.
Price Extensions in 3-Wave Patterns
Extensions take place primarily in the third wave of a 3-wave price pattern. in a regular 3-wave pattern in an uptrend, the correction does not go lower than the bottom of wave 1. in extensions out of a bear trap formation of irregular bottoms, the correction can go lower than the low of the first impulse wave. The two basic chart formations for price extensions are show in figure.
Exploring price extensions means investing against major trend directions. Working with extensions also suggests that an investor is looking for quick profits by taking advantage of imbalances in the marketplace. Therefore, it is important to know in advance not only when to enter a position, but also when to exit it. Entry rule, stop-loss rule, and profit target always must be integrated to achieve long-terms investment strategies that are consistently profitable.
Three consecutive analytical steps are needed to calculate price targets in price extensions of the third wave out of a 3-ave chart formation:
- A minimum swing size has to be defined for the sizes from peak to valley of the first impulse wave of the 3-wave patterns.
- the swing size has to be multiplied by the Fibonacci ratio 1.618.
- the resulting value is added to the size of the initiating swing to define the price target.