What are Fibonacci Time Zones
Fibonacci time zones are a technical indicator referenced by traders when identifying time periods where the price of an asset experiences a particular level of movement.
BREAKING DOWN Fibonacci Time Zones
Fibonacci time zones involve a special charting technique, which is made up of a series of vertical lines corresponding to a sequence of Fibonacci numbers. Fibonacci numbers are sequence of numbers where each successive numeral is the sum of the last two numbers in the sequence, i.e. 1, 2, 3, 5, 8, 13, 21, 34, and so on.
The charting technique involves a trader choosing a position to begin on the chart (generally after a significant move), and then places a vertical line on each subsequent day corresponding to the position in the Fibonacci number sequence. Fibonacci numbers play a major role in identifying areas where prices change direction or make big moves.
Fibonacci numbers are also important because of the so-called golden ratio of 1.618. This golden ratio is found everywhere in nature. In the Fibonacci sequence as described above, any given number is approximately 1.618 times the preceding number. Fibonacci numbers and lines gain their name from the Italian mathematician Leonardo Fibonacci, who developed mathematical sequence as described above.
Looking at Other Fibonacci Indicators
Since many traders understand Fibonacci numbers and the golden ratio to play a crucial role in finance, a number of technical indicators are derived from the Fibonacci number scheme and are so named. In addition to Fibonacci time zones, techniques include Fibonacci retracements, Fibonacci arcs and Fibonacci fans.
With respect to the golden ratio, traders using Fibonacci techniques will focus on three percentages based on the golden ratio, otherwise called the golden mean. These key percentage ratios are 38.2 percent, 50 percent, and 61.8 percent. These ratios are formulated by dividing the next highest number. For example, 89/55 = 0.618 and 13/34 = 0.382. Traders can calculate percentages as high or low as needed based on this application.
Using these percentages, traders may perform Fibonacci retracements, which are horizontal lines on a chart showing areas of support and resistance; Fibonacci arcs, which are compass-like movements originating from a high or low, and representing areas of support and resistance; and Fibonacci fans, which are diagonal lines generated using a high and a low and represent areas of support and resistance.
Of these, Fibonacci retracements are most commonly used in technical analysis. Fibonacci studies is a somewhat subjective calculus because traders individually choose their highs and lows.