This technical analysis guide covers the use of Fibonacci time extensions. We explore what data traders gather with extensions, how they’re drawn up on a chart, and what trading insight they give.
We also discuss Fibonacci time zones, an essential aspect to understand if traders are to use time extensions effectively.
What Are Fibonacci Time Extensions Used For?
Fibonacci Time Extensions are used to predict periods of price change (i.e. lows or highs).
For example, after a downtrend, a reversal might be expected at a significant Fibonacci Time Extension line.
Similarly, after an uptrend, a reversal warning might occur if a Fibonacci Time Extension was soon approaching.
Where Is It Drawn On A Chart?
The Fibonacci Time Extension tool is created by locating a significant high (low) and finding a significant retracement or extension low (high).
The major Fibonacci ratios are then calculated and plotted by charting software.
An example of a Fibonacci Time Extension is shown below in the chart below of the S&P 500 exchange-traded fund (SPY):
What Other Fibonacci Tools Are There?
Whether or not a trader believes Fibonacci ratios work beyond nature and into the financial markets, traders should be aware of Fibonacci Retracements (most often used) and the other Fibonacci Tools like arcs and fans.
Many traders believe that Fibonacci ratios apply to the financial markets. This presupposes that there might be real supply and demand forces working on the markets at these important Fibonacci junctures.
This would be important because, after all, supply and demand is the concept that moves the markets.
Where Can I Start Using Fibonacci Time Extensions?
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What is a Fibonacci time zone?
Fibonacci time zones are a set of vertical lines that are used to determine considerable price changes, increase or decrease, at the point where the vertical lines are drawn. These time zones, or time targets, are analyzed and like retracements, are used to speculate on future support and resistance levels.
How are Fibonacci time extensions used?
In order to use Fibonacci time extensions to calculate time zones, traders need to have a Fibonacci sequence at hand, say, 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89. Then, a chunk of this sequence is selected to determine where the lines are placed. The numbers represent the trading time, or session, so traders often ignore the first numbers of the sequence to avoid miniscule time frames.