4.25 Trading with Fibonacci Time zones
Fibonacci time zone is altogether a different kind of technical indicator. The times zones are what the name says, add Fibonacci to the name and once again those are what the name say. And what the name says is time zones based out of Fibonacci services of numbers.
All other technical indicators analyze the price-action on time axis. Fibonacci time zone is one indicator which has no place for the price in its calculation. Read ahead and though this statement is correct but later we will prove that this statement is not 100% correct - 99.99%, yes. But then that 0.01% makes a HUGE difference.
Though now you already know what a Fibonacci series of numbers is but let's have a quick recap for the ready reference. As we have seen that Fibonacci series starts with 0 and 1 and then extended by adding the two prior numbers to get the next. By doing so it comes up as follows:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987... and so on.
Each number in the series is the sum of two prior numbers.
Fibonacci time zones are nothing but vertical lines at distances to these numbers. These lines divide your chart in zones with the width equivalent to Fibonacci numbers. Let's say you are working with daily chart, then the zones will have widths as follows:
- 1st time zone = 1 day
- 2nd time zone = 1 day
- 3rd time zone = 2 days
- 4th time zone = 3 days
- 5th time zone = 5 days
- 6th time zone = 8 days
- 7th time zone = 13 days
- 8th time zone = 21 days
.... and so on. If you are working with hourly chart then you can replace the "days" by "hours".
Drawing Fibonacci Time Zones
- During a downtrend, click on an important low or trough and drag the mouse vertically up to a desired height and click again. You will see vertical lines defining the zones according to Fibonacci numbers come up on your chart.
- During an uptrend, click on an important peak and drag the mouse vertically down to a desired depth and click again. You will see vertical lines defining the zones according to Fibonacci numbers come up on your chart.
What the Fibonacci Time Zones Signify
Well, the beginning of a new time zone is considered to be an area for the beginning of a major market movement. Most of the times it is expected to bring consolidation or reversal but you should mainly take it as an area to expect a major market move.
Is price not important for Fibonacci Time zones?
You have seen that we are just breaking the chart in time zones and price has not at come into the picture. But can we expect to forget about the price? Are these time zones completely independent of the price action? Well, on the face value it looks so but as mentioned above, it is not 100% correct. Price does come into the picture. But it comes into the picture only once - at the very beginning - the point of start from where you wish to break your chart into these zones.
The essence is that the starting point, from where you wish to draw the Fib time zones, needs to be an important low or high during that period.
Trading with Fibonacci Fan
Avoid first 7 or 8 narrow zones i.e. which define the first 13 or 21 periods. You can start trading after these, once the zones start widening up.
What would be better than taking an example of USD/JPY, spanning a few years, from the time it had gone it's multi-year low of 75/76. Check out the following daily Forex charts to see the journey with the Fibonacci time zones:
Chart from February 2012 to October 2012
Chart from October 2012 to July 2013
Chart from the next time zone till June 2014
During a downtrend you may expect consolidation towards upside. Check 4 or 5 price bars before the price action hits the vertical line starting a new zone and you can opt for taking a long position with a stop-loss slightly below the low of these prior 4 or 5 bars.
An important point to note here is that if there has already been a correction going on in the ongoing downtrend, there is a possibility that the correction ends while hitting the new time zone. In such case an entry for a short-selling position may be something to look forward to.
During an uptrend you may expect consolidation towards downside. Check 4 or 5 price bars before the price action hits the vertical line starting a new zone and you can opt for taking a short-selling position with a stop-loss slightly above the high of these prior 4 or 5 bars.
Similar to the downtrend example, if prices have already started consolidating before the new zone starts, there is a possibility that the correction ends while hitting the new time zone. In such case the uptrend may resume and you may like to take a long position.
During sideways market
Here you are on the mercy of the chance factor. However, there are good possibilities to see a reversal of the trend if there has been a strong trend prior to this sideways movement. It is still advisable to wait and see if a reversal starts and then to take a position in that direction.
- Introduction to Fibonacci Time Zones