How To Use Fibonacci Time Series
Many Clients Have Asked me how to use this tool and If I do use this tool. The simple answer is that I really do not use it. However I do know how to use it.
Let me go over exactly what it is, and how to apply it with my Trend Reactionary Numbers.
Fibonacci Time Zones are vertical lines based on the Fibonacci Sequence. These lines extend along the x axis (date axis) as a mechanism to forecast reversals based on elapsed time. A major low or high is often chosen as the starting point. Distances start relatively small and grow as the Fibonacci sequence extends. Chartists can extend the Fibonacci Time Zones into the future to anticipate potential reversal points.
The Sequence and Ratios
This article is not designed to delve too deep into the mathematical properties behind the Fibonacci sequence and Golden Ratio. There are plenty of other sources for this detail. A few basics, however, will provide the necessary background for the most popular numbers. The Fibonacci sequence is named after Leonardo of Pisa, who was known as Fibonacci. Fibonacci’s 1202 book Liber Abaci introduced the sequence to Western European mathematics, although the sequence had been described earlier in Indian mathematics. (By modern convention, the sequence begins with F0 = 0. The Liber Abaci began the sequence with F1 = 1, omitting the initial 0, and the sequence is still written this way by some.) (1170-1250), an Italian mathematician from Pisa, is credited with introducing the Fibonacci sequence to the West.
It is as follows:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610……
The sequence extends to infinity and contains many unique mathematical properties.
• After 0 and 1, each number is the sum of the two prior numbers (1+2=3, 2+3=5, 5+8=13 8+13=21 etc…).
• A number divided by the previous number approximates 1.618 (21/13=1.6153, 34/21=1.6190, 55/34=1.6176, 89/55=1.6181). The approximation nears 1.6180 as the numbers increase.
• A number divided by the next highest number approximates .6180 (13/21=.6190, 21/34=.6176, 34/55=.6181, 55/89=.6179 etc….). The approximation nears .6180 as the numbers increase. This is the basis for the 61.8% retracement.
1.618 refers to the Golden Ratio or Golden Mean, also called Phi. The inverse of 1.618 is .618. These ratios can be found throughout nature, architecture, art and biology.
….the proportion of .618034 to 1 is the mathematical basis for the shape of playing cards and the Parthenon, sunflowers and snail shells, Greek vases and the spiral galaxies of outer space. The Greeks based much of their art and architecture upon this proportion. They called it the golden mean.
Interpretation
The slow start in the Fibonacci sequence creates relatively tight clustering at the beginning of the Fibonacci Time Zones. Sometimes, it is necessary to ignore the first 5 or so time zones. After the first five zones, these zones expand quite quickly as the sequence unfolds. According to the theory, potential reversal points can be found by looking ahead 21, 34, 55, 89 and 144 days or periods, all of which are Fibonacci numbers. 21 days marks the 8th Fibonacci Time Zone. Some subsequent zones are listed below. Remember, you can find future times zones by adding the previous two time zones (89 + 144 = 233).
• 8th zone = 21 days or periods
• 9th zone = 34 days or periods
• 10th zone = 55 days or periods
• 11th zone = 89 days or periods
• 12th zone = 144 days or periods
• 13th zone = 233 days or periods
Mark The Most Recent High(low) where as Price has broken A Trend Reactionary Number
Fibonacci Time Zones are called “zones” for a reason. They are not hard reversal points, but rather potential reversal points to watch as prices approach this zone. Fibonacci Time Zones provide a cross between cycle analysis and Fibonacci analysis. Both have a wide following and turning points can be forecast weeks and months in advance. However, these forecast points serve as an alert for a potential trend reversal. As these reversal points approach, chartists should turn to other aspects of technical analysis to actually confirm the reversal. This could be a bullish or bearish pattern, bullish or bearish candlesticks, bullish or bearish indicators or clues from the price chart itself.