Technical Analysis Tool Fibonacci Channel – Construction and Application

The Fibonacci sequence is a numerical sequence in which each next term is the sum of the two previous ones:
1,1,2,3,5,8,13,21,34,55,89, … These figures are connected by a number of interesting relationships. Each number is approximately 1.618 times the previous number. Each use case corresponds to approximately 0.618 of the following.

This remarkable property of the Fibonacci sequence is reflected in a number of technical tools used in market analysis. The general principle of interpreting these tools is that when the price approaches the lines drawn with their help, one should expect changes in the development of the current trend.

It turns out that when analyzing the market, several basic levels are used: 0.0%, 23.6%, 38.2%, 50.0%, 61.8%, 76.4%, 100.0%, 161.8% , 261.8% and 423.6%, the most active. of which 61.%.

These seemingly ordinary numbers make a lot of sense, and let’s see how to use them. Fibonacci patterns are best used in conjunction with other patterns and indicators. They often point to a more general approach. The Fibonacci extension will give you a specific price target, but it makes no sense unless you know a breakout is likely. The Fibonacci price estimation test requires a triangular pattern, volume confirmation, and an assessment of the overall trend. By combining indicators and charts with the many Fibonacci tools available, you can increase your chances of a successful trade. Remember that there is no single metric that shows everything is perfect (if there was, we would all be rich). However, when many indicators point in the same direction, you can get a good idea of ​​where the price is heading.

buildings, we choose an interesting direction for us, with which we plan to work. Volatility and the direction of the chart do not matter, the channels work equally well both with sideways (flat) movement and with a directional trend. With an upward trend, we build a channel based on the minimum price values:
T-1 and T-2 were taken as a basis for the construction of canals. Areas where the price could not cross the channel were marked in red, and after testing for resistance, it returned to the construction line. In a downtrend, the indicator remains at the top of the chart, but at the same level, the channel must be moved down so that it is below the construction line.

How to use Fibonacci Channels?

The strategies for using the channel can be different, the less risky it will be to buy an order in the direction of the current trend when the timeline bounces off the line along which all construction is completed. The order should be closed when the price reaches the level and there are signals of its rapid reversal. Why use a technical indicator from a group of oscillators or a Price Action strategy without an indicator? The latter option is better because it provides more accuracy. Depending on the usage strategy, the channels will not differ from Fibonacci levels, but can be used for global trend movements and high volatility. The essence of the technical analysis tool Fibonacci channel – construction, interpretation of results, practical application in trading: https://youtu.be/izX0GDoupGA

The author’s strategy for using the Fibonacci channel

One of the strategies for using the Fibonacci channel is to test its signals not immediately, but by changing the direction of price movement. If the asset is in an uptrend, the Fib channel will not stretch higher (as shown in the sidebar above), but lower, as if it were in a downtrend. In this case, the construction is carried out according to the extreme values ​​of the price movement, which form the same “shores” that limit the construction of the chart. When the construction lines are broken, movement levels are obtained to confirm the change of direction and determine the exact time of the opening commands:
The fibo channel in the screenshot is built at points T-1 and T-2, its width is set to the width of the corridor – at T-3. The construction lines on which the points are based are the main band of the graph. After a trend change, levels indicating consolidation help determine the best time to enter the market:
The green dots on the screenshot show the moments of the levels that did not pass. The blue circles intersect with the Fibonacci channel levels, so now is a great time to open trades to reduce the size. Thus, the correct use of the level can increase the accuracy of any trading system and make the average trader a real financial market sniper. The Fibonacci pattern can be applied to channels not only vertically, but also diagonally, as shown in the diagram:

When used in conjunction with Fibonacci Channels, it can provide the trader with additional confirmation that the price level will act as support or resistance. The same principles and rules apply to these channels as for vertical samples. One common technique used by traders is to combine diagonal and vertical Fibonacci indicators to find areas where both indicate significant resistance. This may indicate a continuation of the dominant trend. Parallel channel action allows traders to predict support and resistance values. There are joint methods of working with the price channel and ways to build them. One method is to act only on the confirmed channel.

A justified channel is a channel organized on two low and two high points. However, in practice it often happens that after its confirmation, the channel changes direction.

Let’s test the price movement forecast in the future channel. Fibonacci levels will help us here.
Figure 1 shows an upward movement. In any directional movement there are correction factors. Correction often occurs in the previous direction at Fibonacci levels. Most often 38.2% or 61.8%. And here the cost fluctuated around 61.8%.
Figure 2 shows the same price table, only labeled. Our task is to designate point 3 as the second point of the upper edge of the ascending channel. To correctly indicate the direction of the channel, set the minimum points on the path section and mark them with the number “0” and so on. Draw these points with line 02. At point 1 (the first high of the upper boundary of the ascending channel), draw a parallel line 0 2. Fibonacci retracement levels increased during retracement wave 12. As already mentioned, reversals occur near Fibonacci levels. In channels, pivot points are usually at the intersection of Fibonacci levels (100%, 161.8%, rarely 261.8%) with the edge of the channel. In this case, the reversal occurred near the level of 161.8%. To secure T/P, it is best to bet small to avoid Fibonacci levels. Such markup will allow you not to miss good transactions when the channel has not yet been formed. Descending lines are marked similarly. You just need to strictly follow the rules that in ascending channels we work only upwards, and in descending channels – downwards. Another Fibonacci trading strategy: https://youtu.be/0BtQeH-XNbQ

Correction levels based on Fibonacci

This is the simplest use of Fibonacci numbers. They are based on the fact that the trend can be divided into 6 parts, and any part will have a certain value. To build a Fibonacci grid (sometimes referred to as levels), you need to find a reasonably clear up or down trend and drag the grid from start to finish.
After a long trend, it doesn’t matter which direction the pullbacks go, and that’s how the 61.8% pullback from the previous trend occurred.
This is the basis of the Fibonacci level trading strategy. Here are some sample sentences:

But there are other levels besides the 61.8% and 161.8% levels. They don’t really carry much of a load, but you can also swap them around or use them as targets and checkpoints.

Pros and cons of the Fibonacci tool

The key advantages of the indicator are the ability to:

• predict profit targets and stop losses accurately;
• promptly execute pending orders;
• use trend and anti-trend strategies;
• work at any time, both in the middle of the day and at long intervals.

The main disadvantages of the indicator:

• not suitable for small TF;
• it is more difficult to build algorithmic strategies according to Fibonacci than according to other indicators. Because of this, it is more difficult to test on a large number of instruments in order to find out the true Fibonacci indicators in trading;
• difficulty in determining the starting point (beginning of a trend);
• uselessness of the indicator on flats.

After analyzing all the pros and cons, we can conclude that Fibonacci can be used as an additional technique to determine our positions, but only as an additional one. Don’t buy or sell 50%, 61.8% at random and expect positive long-term results – the markets are overly complex to guide one Fibonacci value.