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.

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