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Thursday, June 26, 2008

Fibonacci Time Zones Technical Indicator

Fibonacci time zones are one other extensively used technical indicator based on Fibonacci numbers. These are used to forecast timings of major price changes. Fibonacci time zones are a series of vertical lines placed at increasing intervals according to Fibonacci numbers (1, 2, 3, 5, 8, 13, 21, 34, 55, etc). They are useful for both upward and downward trends.

Fibonacci time zones favor long-term traders more because of the easy to plot lines and interpret them. First line is usually a day where there is a major move. Successive lines are placed on subsequent days correspond to Fibonacci numbers (1st, 2nd, 3rd, 5th,…days). Many swing traders also use Fibonacci time zones with shorted base time intervals based on hours rather than days. A modern approach is to find a base interval (time between 2 tops or bottoms) and then multiplying it with the Fibonacci golden ratio (1.618) to plot the lines.

Although hard to explain, Fibonacci time zones possess a high degree of predicting power (around 70%). Often these are time zones of trend reversals or large price changes in trend direction. Many forex and stock traders use these time zones to enter or exit trades. Remember there can also be major price changes between Fibonacci time zones. Many traders plot multiple time zones on same graph to overcome this issue.

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