Human behavior is not only reflected in chart patterns as large swings, small swings or trend formations. Human behavior is also expressed in peak-valley formation. Fibonacci channels make use of peak and valley formations in the market and lead to conclusions on how to safely forecast major changes in trend directions.
The secret of Fibonacci channels is to identify the correct valleys and peaks to work with. Support and resistance lines can be drawn weeks and months into the future, once the appropriate tops and bottoms in the market have been detected. Only major tops and bottoms should be considered for a base line of a Channel with one or more prominent side swings. The widest swing within a time frame of the base line is used for a trigger line.
Fibonacci channels are a method of predicting levels of support and resistance for a given market. Although Fibonacci channels fall under the general category of Fibonacci studies for technical analysis, the channels aren’t among the most popular tools used by traders today.
Fibonacci channels are variants of the more-popular Fibonacci retracement strategy, with retracement lines running diagonally rather than horizontally. To generate Fibonacci channels for a chart, a trader first creates a base channel by drawing parallel lines through a price top and price bottom. The slope of the Fibonacci channel is determined by connecting either two bottoms or two tops, depending on the overall trend: in a downward trend two bottoms are connected, while in an upward trend the slope is generated from two tops. Once the base channel is drawn, additional parallel lines are drawn above or below it, with the distance between lines determined by Fibonacci numbers: 0.618 times the width of the original channel, then the width of the original channel, then 1.618 times to the width and so on, multiplying each number by the golden ratio 1.618 to determine each successive width. These Fibonacci channels determine the support and resistance levels for the market within the overall trend.
When used, Fibonacci channels are often drawn along with Fibonacci retracement charts. The points where the diagonal lines and horizontal lines cross are considered to be exceptionally strong levels of support or resistance for the market.