Fibonacci extensions are a helpful tool used by traders to pinpoint potential support and resistance levels that may offer additional insight on calculated risk and reward scenarios of a given security. Fibonacci extensions make use of a series of numbers discovered by 13th-century Italian mathematician Leonardo Fibonacci. Although there is no hard evidence that Fibonacci ratios are found in everyday life, some investors firmly believe these universal number sequences may have implications in the financial markets as well.

The Fibonacci extensions do not have a formula, but are drawn at three points on a chart by connecting the highest and lowest points of a security's movement. In general, the farther a Fibonacci extension point appears from the origin, the less significant it may be, as the security's price is increasingly more likely to achieve longer-term support and resistance. It is important to remember, however, that the Fibonacci extensions are by no means perfect and should not be relied upon exclusively.

Common Fibonacci extension levels include 61.8%, 100%, 161.8%, 200%, and 261.8%. These levels indicate possible areas of importance when a security undergoes a large price movement and pullback. The Fibonacci extension levels give an indication of where a security could potentially move to once the retraction from the previous wave is complete. This allows investors to calculate their risk and reward scenarios based on two or more points in the wave.

When used in conjunction with other technical tools, the Fibonacci extensions can help investors strategize their entry and exit points. Furthermore, the extensions can be used to identify levels of significance for stop losses, as traders may consider the use of a priceline located between one of the Fibonacci levels and the point of origin. Although the Fibonacci extension levels are not a perfect tool and should not be used as the sole indicator of what is to come in the markets, they can provide insight into potential supports and resistances that can help traders strategize their risk and reward scenarios. The use of the extension levels should be done in combination with other technical analysis tools, as these levels can provide investors with additional insights into potential areas of importance.