Fibonacci channel technical analysis tool – construction and application

Методы и инструменты анализа

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 one. Each use case corresponds to approximately 0.618 of the following.
Fibonacci channel technical analysis tool - construction and applicationFibonacci levels [/ caption] This remarkable property of the Fibonacci sequence is reflected in a number of technical tools used in market analysis. The general principle of interpretation of these instruments 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 indicate a more general approach. The Fibonacci Expansion will give you a specific price target, but that doesn’t make sense unless you know a breakout is likely. The Fibonacci price assessment 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 the chances of a successful trade. Remember that there is no single metric that would show everything perfectly (if there was one, we would all be rich). However, when many indicators point in the same direction, you can get a good idea of ​​where price is heading.
Fibonacci channel technical analysis tool - construction and applicationPlotting the Fibonacci Channel [/ caption] All Forex strategies that use corridors or channels to determine price patterns are very effective tools. In this case, the movement of the image can be represented as a river, and such channels – as its banks, which limit and lead this river in a strict direction. The advantage of the Fibonacci channel over competitors is that it can be used to solve several problems:

  • determine the time for price correction and consolidation;
  • precise determination of when the general trend changes;
  • an overview of the most favorable times for opening orders;

This indicator is easy to use, but it can significantly improve the accuracy of any trading system.

How to build a Fibonacci channel in the terminal and on your own?

To create Fibonacci channels in the MetaTrader4 terminal, select: “Insert” – “Channels” – “Fibonacci”:
Fibonacci channel technical analysis tool - construction and applicationFibonacci in the MetaTrader4 terminal [/ caption] For the most we choose an interesting direction for us, with which we plan to work. The volatility and direction of the chart do not matter, the channels work equally well both with a sideways (flat) movement and with a directional trend. With an upward trend, we build a channel based on the minimum price values:
Fibonacci channel technical analysis tool - construction and applicationT-1 and T-2 were taken as the basis for the construction of the 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 needs to be shifted 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 the entire construction is completed. The order should be closed when the price reaches the level and there are signals about its rapid reversal. Why use a technical indicator from a group of oscillators or a Price Action strategy without an indicator? The latter is better because it provides more precision. Depending on the strategy of use, the channels will not differ from the Fibonacci levels, but can be used for global trend movements and high volatility. The essence of the Fibonacci channel technical analysis tool is construction, interpretation of results, practical application in trading:

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 an asset is moving in an uptrend, the Fibo channel will not stretch higher (as shown in the sidebar above), but lower, as if it were working in a downtrend. In this case, the plotting is carried out at the extreme values ​​of the price movement, which form the same “banks” that restrict the plotting of the chart. When the construction lines are broken, movement levels are obtained to confirm the change in direction and determine the exact time of the opening commands:
Fibonacci channel technical analysis tool - construction and applicationThe 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 plot lines on which the points are based are the main plot bar. After a trend reversal, levels indicating consolidation help determine the best time to enter the market:
Fibonacci channel technical analysis tool - construction and applicationThe green dots in 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 downsize trades. Thus, the correct use of the level can increase the accuracy of any trading system and make the average trader a real sniper of the financial market. The Fibonacci pattern can be applied to channels not only vertically, but also diagonally, as shown in the diagram:
Fibonacci channel technical analysis tool - construction and applicationFibo Diagonal [/ caption] 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 to vertical samples. One of the generally accepted methods 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. Action in parallel channels allows traders to predict the value of support and resistance. There are joint techniques for working with a price channel and ways to build them. One method is to act only on the confirmed channel.

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

Let’s test the forecast of the price movement in the future channel. Fibonacci levels will help us here.
Fibonacci channel technical analysis tool - construction and applicationFigure 1 shows an upward movement. There are correction factors in any directional movement. A retracement often occurs in the previous direction at Fibonacci levels. Most often 38.2% or 61.8%. And here the cost fluctuated around 61.8%.
Fibonacci channel technical analysis tool - construction and applicationFigure 2 shows the same pricing table, only labeled. Our task is to designate bar 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 section of the path and mark them with the number “0” and so on. Draw these points with line 02. At point 1 (the first high point 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 found 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 161.8% level. To secure T / P, it is best to place small bets to avoid Fibonacci levels.Such markup will allow not to miss good transactions when the channel has not yet been formed. Descending lines are marked in the same way. You just need to strictly follow the rules that in the ascending channels we work only upward, and in the descending channels – downward. Another trading strategy based on Fibonacci levels:

Retracement levels based on Fibonacci

This is the simplest use of Fibonacci numbers. They are based on the fact that a trend can be divided into 6 parts, and any part will have a certain value. To build a Fibonacci grid (as levels are sometimes called), you need to find a fairly clear trend up or down and drag the grid from start to finish.
Fibonacci channel technical analysis tool - construction and applicationAfter a long trend, it doesn’t matter in which direction the pullbacks are going, and this is how a 61.8% rollback from the previous trend took place.
Fibonacci channel technical analysis tool - construction and applicationThis is the foundation of the Fibonacci level trading strategy. Here are some example sentences:

But besides the 61.8% and 161.8% levels, there are other levels. They don’t really carry a lot of 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:

  • accurately predict profit targets and stop losses;
  • 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 using Fibonacci than using 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 rates in a trade;
  • the difficulty of determining the starting point (the beginning of the trend);
  • uselessness of the indicator on flat.

Having analyzed all the pros and cons, we can conclude that Fibonacci can be used as an additional technique to determine your 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 difficult to drive with a single Fibonacci reading.

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