Fibonacci Channel
Tue, Apr 15Human behavior is not solely evident in chart patterns such as large swings, small swings, or trend formations. It is also manifested in peak-valley formations. Fibonacci channels utilize these peak and valley formations in the market to draw conclusions about safely forecasting significant changes in trend directions.
The key to Fibonacci channels lies in accurately identifying the relevant valleys and peaks. Once the appropriate tops and bottoms in the market are recognized, support and resistance lines can be projected weeks or months into the future. Only major tops and bottoms should be used as a baseline for a channel, which may include one or more notable side swings. The widest swing within the timeframe of the baseline serves as a trigger line.
Fibonacci channels are a technique for predicting support and resistance levels in a specific market. While they fall under the broader category of Fibonacci studies in technical analysis, they are not among the most widely used tools by traders today.
These channels are variations of the more popular Fibonacci retracement strategy, with retracement lines oriented diagonally instead of horizontally. To create Fibonacci channels on a chart, a trader begins by establishing a base channel by drawing parallel lines through a price peak and price trough. The slope of the Fibonacci channel is determined by connecting either two bottoms or two tops, depending on the prevailing trend: in a downward trend, two bottoms are linked, while in an upward trend, the slope is derived from two tops. After the base channel is established, additional parallel lines are drawn above or below it, with the spacing between lines dictated by Fibonacci numbers: 0.618 times the width of the original channel, then the width of the original channel, followed by 1.618 times the width, and so forth, multiplying each number by the golden ratio of 1.618 to calculate each subsequent width. These Fibonacci channels help define the support and resistance levels for the market within the overall trend.
When applied, Fibonacci channels are often used alongside Fibonacci retracement charts. The intersections of the diagonal and horizontal lines are regarded as particularly strong levels of support or resistance for the market.
For channels, a peak and trough of a price movement are selected to represent a unit width. Subsequently, a series of parallel lines is drawn on the chart based on multiples of the unit width: 0.618, 1.00, 1.618, 2.618, 4.236, and so on. These multiples indicate the probable points of future support or resistance levels.
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