Fibonacci Bands are derived from Fibonacci ratios expansion fiom a fixed moving average. These bands help traders find key areas of support and resistance. “Fibonacci bands” are computed by adding a Fibonacci ratio distance (Up and Down) from a “key moving” average (21, 34, 89 periods). An 8 period average of “True range” is computed. The multiples of Fibonacci ratios of this range are added to the fixed moving average to compute Fibonacci Bands (Fib. Bands formulas are provided below).
One of the best ways to find trend reversals is to watch the price action near the extreme bands (both lower and higher). Markets tend to reverse when prices trade outside of the band for a few bars and again trade inside the bands. After reversals, markets also tend to trade from one extreme band to the other end (opposite) of the extreme bands.
In my view, the best results can be obtained from using multiple time-frames for the same instrument. Fibonacci Bands indicator may be used along with the other indicators. When shorter time-frames signals are aligned with a larger time-frame trade signals, the Fibonacci Bands signals and the market may be in sync. Trades are usually taken in the direction of a larger time-frame. The “short-term” band support/resistance areas are used for “entry” and “exit” setups. During market rallies, utilize exhaustion or trend based market indicators along with Fibonacci Bands. During congestion zones use non-momentum based indicators for better results.
Trading Fibonacci Bands
Trading Fibonacci Bands
The example above shows Fibonacci Bands plotted from the Russell 2000 Emini 610 tick chart. The middle line shows the 89 period moving average and 1.62 and 4.62 Fibonacci Bands (Upper and Lower). Trades are only initiated in the direction of market reversals. On April 24,2007, the markets sold-off in the morning session and traded in a steep price decline. At about 11.30 am, the price closed outside the Fibonacci’s extreme lower bands and signaled a potential reversal. When prices are traded inside the band, enter a “long” trade 1 tick above the high of the previous bar. Place a “stop” order below the low of the recent “swing low” outside the Fibonacci Band. Targets can be set using the moving average (89 periods) and extreme band range.
Trading Fibonacci Bands
Trading Fibonacci Bands
The example above shows Fibonacci Bands from the Russell 2000 Emini 61 0 tick chart. On April 30, Russell 2000 (ER2) experienced weaker markets and traded below the moving average (Center Line). At 2.30 pm, the price closed outside the Fibonacci Bands to signal a potential reversal. Subsequent bars have not produced any trades as the price did not close above the high of the break-in bars for a reversal. Price also quickly traded outside the extreme Fibonacci Bands to signal further weakness. Upside trade reversals did not occur until the price re-enters the band. Traders can use Fibonacci Bands to effectively find key entry and exits based on the trend reversals occurring near these extreme bands.
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