If you were to search around the forum for “fibonacci” or “fibonacci retracement”, you’re likely to find some great threads that explain the use of this fibonacci study and are filled with examples of fibonacci retracements in action. Discussion and use of fibonacci extensions is not as common.
Fibonacci extensions can be a little confusing, and I usually think of them as more of an intermediate level tool, whereas working with fibonacci retracements and projections are better to cut your teeth on. To answer your initial question: fibonacci retracements can be determined without use of extension, but not really the other way around. I’ll explain why in a moment.
First: [I]projections[/I] and extensions are very similar, but are constructed in different ways and are more or less useful in different scenarios. A couple notes before getting to that:
Fibonacci retracements are draw from a low to a high (or high to low) and are then used to map forward over time to determine those levels price is likely to pullback (throwback) to.
Building on that, fibonacci projections outline further levels to which price will gravitate if the .786% and then 100% retracement levels are breached. Once price has retraced a low to high/high to low 100%, it is no longer “re-tracing”. Once price breaks through that 100% low or high and keeps going, the old retracement levels are good to have around for future support/resistance levels, but do nothing for determining where price is headed next. That’s where projections fit in: 127.2%, 161.8%, 261.8%, 423.2% of the retracement are common projection points. Most fibonacci retracement studies plot projection points by default. I find projections highly useful and would recommend learning to apply them.
Building a bit further, we come to fibonacci extensions. The BP school does a great job of explaining them. Extensions follow a 1-2-3 pattern (in some cases, what’s called a “measured move down” or “measured move up” chart pattern). Points 1 and 2 are established by the fibonacci retracement. Point 3 is the deepest point to which price then retraced. The “extension” is mapping the range of points 1 and 2 over the chart starting at point 3. In that way you come up with a 1-2-3-4 zig-zag pattern, where point 4 is the 100% extension. The range of points 1 and 2 is then equaled by the range between points 3 and 4; but as with projections, price can go beyond the 100% extension point.
The difference is that projections measure where price will go if it exceeds a 100% retracement. Extensions measure forward movement of the 3-4 wave. So, you can think of projections as a V where the right side continues above the highest level of the left side, while extensions are lightning bolt shape where the bottom right tail can potentially keep going.
By definition, projections build off of retracements. Extensions also need a retracement to be constructed, but that retracement (point 3) might not coincide exactly with a fibonacci level. Regardless, once point 3 is in, fibonacci ratios are used to determine the extension levels from point 3 to 4 and beyond. You can see then, why retracements are useful (to determine pullbacks/throwbacks) without extensions, whereas extensions cannot be created without a previous retracement.
Practically, use all three of these studies, and a couple more besides. Where a low is followed by a high that seems to produce sturdy resistance, plot a fibonacci retracement. That will give you good idea of what levels between the high and low price is likely to respect and pivot off of. Some retracement levels produce reversals more than others (.618 and .786 come to mind). If price cuts through all of those levels and then violates the low, you know you’re probably in for a significant down move; but to where? Well, fibonacci projections will help with that: will it be 127.2%, 161.8%, 261.8% or even 423.2% of that move from the high back to the low? On the other hand, if price goes from low to high, and then retraces 78.6% back to the low and then pivots, take the range from the original low to the high and then map that over the future, beginning with the new low at the .786% retracement level. That will create your extensions.
Long story short: Retracements don’t need extension or projections; but extensions and projections need retracements. Over the arc of a retracement/projection, you have a V shape. Projections are a continuation of price retracing. Over the arc of a retracement/extension, you have a zig-zag/lightning bolt. Extensions are the measure of the high-low/low-high mapped over the future beginning with a retracement of that high-low/low-high. Both extensions and projections develop price targets.
I realize that’s a lot of words with no charts for reference. If you like, I’m happy to pull some charts and post them here. Otherwise, I hope that gives a bit of clarification.