In this article we are going to discuss the Fibonacci time zones.
What are Fibonacci time zones?
The Fibonacci sequence is also used to calculate the time, when the current trend reversal will occur. Fibonacci time zones is a very unique instrument for technical analysis, because very few other indicators are based on or would be able to determine at which point in the future time a reversal may occur.
The concept behind and different types of Fibonacci time zones
This instrument counts the number of candlesticks (time) between reversals in the market, after which this value is multiplied by the corresponding Fibonacci coefficient, such as 0.382; 0.618; 1.382; 1.618, and so forth.
Typically, there are two instruments based on the Fibonacci sequence: Fibonacci time zones and Fibonacci time zones based on the trend. Despite the fact that the general principle of calculation of these instruments is the same, there is a fundamental difference between them, because Fibonacci time zones that are based on the trend cover the previous trend and therefore in our opinion a more objective instrument.
How to set up and build the Fibonacci time zones?
The general principle of building Fibonacci time zones is as follows: during an upward, bullish trend, a trader needs to choose 2 significant highs (or peaks), and likewise on a down or bearish trend the trader needs to choose 2 significant lows. On the Olymp Trade platform, in the section of “Technical Analysis”, when choosing this instrument, it is sufficient to choose only one significant high or low. Once you have selected the high or low, the Fibonacci time zones will line up automatically.
How to set up and build the Fibonacci time zones based on trend?
Fibonacci time zones based on the trend use the previous bullish or bearish trend in its formation. To use this instrument, you first need to draw the so called “base line”. This line follows the previous trend, from the maximum to the minimum, or from the minimum to the maximum, depending on the previous direction of the trend. The base line is essentially the necessary element for calculating the number of Japanese candlesticks (or bars). Once you have constructed the base line, you need to indicate the starting point, which is set at the level of the first maximum or minimum of the new trend, meaning the moment of the first correction and new trend following.
In the technical analysis section of the Olymp Trade platform, that we mentioned earlier, this instrument is called the “Time Extension” and it does not require building a starting point, it is enough to draw the base line following the previous trend. After this, the Fibonacci time zones will line up automatically.
How to use the Fibonacci time zones?
The principle of using Fibonacci time zones is very simple. It is necessary to monitor the price movement when it is nearing the specified time zone intervals, the lines displayed on the grid, and watch for reversals when the price is crossing these lines. Although the principle is quite simple, there is one significant weak point. Unfortunately, it is impossible to say how strong the reversal will be. It can be either a short-term correction or a full trend reversal. Therefore, if it is possible – it is necessary to combine the Fibonacci time zones with other instruments and indicators for a better analysis.
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