Introduction to 3 Classic Fibonacci Trading Systems

Fibonacci, the Italian mathematician, was one of the most talented Western mathematicians of the Middle Ages. He became famous for introducing the Indian-Arabic numeral system into the European academic community. Today, he is also famous among professional traders because the Fibonacci sequence is widely used for predicting price retracement levels and price projections.

However, the application of the Fibonacci sequence is much richer than simply drawing Fibonacci retracement and extension levels. If you want to truly harness the power of the Fibonacci sequence, you should also consider using various other tools, such as Fibonacci arcs, fans, and time zones.

Using circles and time factors in Fibonacci trading

You may already be familiar with drawing Fibonacci retracement levels to find potential support and resistance areas. However, these vertical lines only show us where the market may find major areas. For traditional Fibonacci retracement levels, it's not possible to predict when prices may reach these levels.

Fibonacci circles are the best application for adding elements of the time range to the chart. Thus, we can precisely determine when prices will react to a future support or resistance level and plan our trades accordingly.

The Fibonacci circle displays areas of support and resistance. In the chart, we have drawn a weekly trend line from the low point to the upper limit of the EUR/USD. This line is known as the base line of the Fibonacci circle. Technically, there is no difference in drawing the Fibonacci circle compared to the regular Fibonacci retracement tool.

However, the main difference is that, unlike the Fibonacci retracement tool, the Fibonacci circle displays support and resistance. As you may have guessed by now, the upper half of the circle is the resistance area, and the lower half of the circle is the support area.

In this example, the 1.618 and 2.618 levels of the Fibonacci circle not only provide support, but also make corresponding predictions in the future as the trading trend continues to move to the right and tests the support or resistance levels at specific times.

Fibonacci Fan and Predictive Trendline

Just like the Fibonacci circle, the Fibonacci fan can also provide you with support and resistance level predictions as well as time factors. However, the Fibonacci fan is designed to draw a series of trendlines rather than circles.

Once an uptrend or downtrend is identified, simply connect the low points and high points or high points and low points respectively to draw the Fibonacci fan. The Fibonacci fan tool in the charting software will then create many trendlines based on the Fibonacci sequence. These trendlines may become potential support levels for a downtrend and potential resistance levels for an uptrend.

The Fibonacci fan can be used to draw a fan-like shape that provides potential support in an upward trend. In the chart, we have identified an initial trend (red arrow line) and drawn the Fibonacci fan by connecting the low and high points of this trend. As the EUR/USD began to retrace, it quickly found strong support near the 23.6% Fibonacci support line and bounced back up, soon resuming its upward trend.

Looking ahead, the Fibonacci fan's trend lines continue to provide potential support areas for the future. For example, after the EUR/USD found support near the 38.2% Fibonacci fan trend line, it began its initial rebound.

In a downward trend, these Fibonacci fan trend lines will become potential resistance levels.

Fibonacci Time Zones and Reversal Zones

Most traders often overlook the power of Fibonacci time zones because it is one of the most easily misunderstood and underutilized technical analysis tools.

Fibonacci time zones are represented by vertical lines on a chart. Unlike the typical application of the Fibonacci sequence to predict potential support and resistance levels, vertical time zone lines are only used to predict potential areas of swing high, low, or reversal that may occur in the future.

You can use Fibonacci time zones alone, but it is best to draw historical support and resistance levels on the chart and then draw the vertical Fibonacci time zone lines to correctly identify potential reversal points. Additionally, remember that Fibonacci time zones are referred to as “zones” for a reason - you should expect developments to occur “near” these zones rather than solely on the vertical lines.

Fibonacci time zones can predict potential reversal points in the future, and we plot them from low to high in candlestick charts. However, to better illustrate the potential of using Fibonacci time zones, we have changed to a line chart type.

As expected, the second wave of the uptrend ended exactly on the second vertical line of the Fibonacci time zone. As we mentioned earlier, these lines act as potential reversal areas, and you should not expect prices to change exactly at the position of the vertical line. Therefore, in the third Fibonacci time zone, the reversal of the downtrend occurred before the vertical line, and then a new uptrend began.

Conclusion

The Fibonacci sequence is one of the mysteries of the universe. While there is no scientific evidence as to why these sequences occur frequently in nature and in markets, empirically, there is indeed some correlation between the technical levels derived from the Fibonacci sequence and the price levels.

While learning to use basic Fibonacci retracement levels and incorporating them into your trading strategy is useful, if you really want to harness the power of Fibonacci numbers, mastering the use of Fibonacci circles, Fibonacci fans, and Fibonacci time zones can provide you with the edge needed to consistently beat the market.