What is a 'Fibonacci Channel'

The Fibonacci channel is a technical analysis tool that is used to estimate support and resistance levels based on the Fibonacci numbers. It is a variation of the Fibonacci retracement pattern, with the trendlines running diagonally rather than horizontally. It can be applied to both short-term and long-term trends, as well as to up and down trends. It is often used in the forex market.

BREAKING DOWN 'Fibonacci Channel'

The Fibonacci channel is constructed with a line that extends through the trend’s high and low, and the entire width of the channel and its value is equal to one. Parallel lines are then drawn at the key Fibonacci levels of 23.6 percent, 38.2 percent, 50 percent, 61.8 percent, 76.4 percent and 100 percent. If there are significant trends, traders can also extend the levels beyond 100 percent, such as 161.8 percent, 200 percent, 261.8 percent and 423.6 percent.

Traders can create Fibonacci channels on most major trading software platforms, and they should first draw the base channel depending on the market trend: if the trend is up, the trend line should be drawn between two major peaks upward, and if the trend is down, the trend line should be drawn between two major lows downward. The second line of the base channel will be a parallel line through a point which is the furthest from the first line.

Many traders use the lines drawn by the Fibonacci channel in combination with other support and resistance levels found by other indicators. One common technique is to combine the horizontal Fibonacci retracement levels with the lines established by diagonal Fibonacci channels. The points where the diagonal and horizontal lines intersect are considered to be extremely strong levels of support or resistance for the market.

Fibonacci Channel Trading Strategy

When one diagonal channel line is crossed in a downtrend, it becomes resistance and the below line becomes support. Conversely, when one line is crossed in an uptrend, it becomes support and the above line becomes resistance. Traders can use these support and resistance levels to help to determine buy and sell points. The principle of Fibonacci channel trading is to buy on an uptrend when the price reaches Fibonacci support level and then pulls back, and to sell on a downtrend when the price reaches Fibonacci resistance level and then pulls back. Once the projected tops and markets in the market have been determined, support and resistance lines can be drawn weeks, and even months, into the future.

RELATED TERMS
  1. Fibonacci Time Zones

    Fibonacci time zones are an indicator used by traders to identify ...
  2. Fibonacci Fan

    A Fibonacci fan is a charting technique using trendlines keyed ...
  3. Fibonacci Numbers/Lines

    The Fibonacci numbers and lines are technical indicators using ...
  4. Fibonacci Retracement

    A Fibonacci retracement is a term used in technical analysis ...
  5. Fibonacci Arc

    Fibonacci Arcs are half circles that extend downward from the ...
  6. Trading Channel

    A trading channel is a channel drawn on a security price series ...
Related Articles
  1. Investing

    Taking The Magic Out Of Fibonacci Numbers

    Uncover the history and logic behind this popular trading tool.
  2. Trading

    3 Fibonacci Trades For Late Summer

    Fibonacci retracement analysis organizes chaotic price action, highlighting hidden buying and selling opportunities.
  3. Trading

    Channeling: Charting a Path to Success

    Learn how to trade channels, a chart pattern that tells you where to enter, where to exit and even how long the trade may take.
  4. Trading

    Expect Bitcoin to Fall Before it Rises Again

    Technical signs point to a deeper pullback before the bull trend resumes.
  5. Trading

    Trading Opportunity in These Trend Channel Stocks

    These stocks are all moving within trend channels. With prices of these stocks trading near the extremes of those channels, there's an excellent trading opportunity.
  6. Trading

    Commodity Stocks Still Presenting Buying Signals

    A handful of commodity stocks continue to offer short-term trading opportunities as they move higher within a trend channel.
  7. Trading

    Rising Trend Channel Buying Opportunities

    These two stocks are in long-term rising price channels. Currently trading near support, an upside move indicates another wave higher.
  8. Trading

    Has Amazon Stock Topped Out?

    Short sellers are gathering around Amazon shares, wondering if Thursday's reversal will signal a long-term top.
  9. Trading

    NVIDIA's Failed Breakout Could Signal Steeper Slide

    NVIDIA stock reversed at channel resistance and failed a breakout above $250 following a poorly received first quarter earnings report.
  10. Trading

    Strong Stocks with More Bullish Potential

    These stock are trending, and setting up to go even higher. Here's how to trade them.
RELATED FAQS
  1. What forex strategies use Fibonacci retracements?

    Learn how to use Fibonacci retracements as part of a forex trading strategy. Fibonacci levels are watched to identify support ... Read Answer >>
  2. Why is the Fibonacci Retracement important for traders and analysts?

    Find out why traders and analysts in financial markets use Fibonacci retracement to help identify support and resistance ... Read Answer >>
  3. What are some ways to make a distribution channel more efficient?

    Understand what a distribution channel is and how companies use them to move product. Learn how to make a distribution channel ... Read Answer >>
  4. What is the difference between a direct and an indirect distribution channel?

    Learn about the primary differences between direct and indirect distribution channels, and under what circumstances a company ... Read Answer >>
  5. How are Donchian channels used when building trading strategies?

    Discover how some traders use the Donchian channel method of trend trading, and why Donchian channels work best with a complementary ... Read Answer >>
Trading Center