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Fibonacci Trading, Analysis on Long-Term Charts

Fibonacci Trading, Analysis on Long-Term Charts

Warren Venketas, Analyst

Applying Fibonacci Retracements to Long-Term Charts

Traders often stick with time frames associated with their respective strategies. For example, short-term traders often solely analyze short-term time frames. But, as discussed in our article on Fibonacci and multiple time frame analysis, traders can get greater perspective by looking at the bigger picture, employing multiple chart time frames to conduct their analysis. Fibonacci retracements applied to multiple time frames can help to provide an added perspective to a trader’s analysis.

Talking Points:

  • Benefits of using the Fibonacci on Long-Term Charts
  • How to apply the Fibonacci to a Long-Term Chart
  • Fibonacci on Long-Term Charts: Summary

Benefits of using the Fibonacci on Long-Term Charts

Utilizing a long-term chart for an initial set of Fibonacci levels allows traders to find key levels as per the Fibonacci sequence; and this may hold value on even shorter-term charts or in shorter-term strategies. This can be true for any time frame but the value behind starting on a long-term chart points to the statistical significance of larger sample sizes taken over a more robust data set that can only be offered by time.

Key levels indicated by the Fibonacci tool on the long-term chart can give short-term traders highly important levels that would have not been identified using only a short-term time frame. Once established, these key horizontal levels will serve as support and resistance zones to regardless of trading style.

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How to apply the Fibonacci to a Long-Term Chart

The US Dollar Index (DXY) example below illustrates how long-term Fibonacci retracements can be implemented to work with shorter time frames. Below, a major move was identified, taking the low from 2011 and drawn up to the high in January of 2017. At the time of this writing, neither the high nor low has been traded through, retaining the viability of continuing to use the Fibonacci retracement derived from this major move. The Fibonacci retracement has simply been applied by drawing from the start of the move to the finish, applied on the monthly chart shown below.

US Dollar Index (DXY) monthly chart (2009-2020):

DXY monthly chart

Chart prepared by James Stanley; USD, DXY on TradingView

Right off the bat, you’ll probably notice a couple of very obvious inflections at 50% and 38.2% retracement levels. And to be sure, such an observation can be of value to the trader. But these instances are more pertinent to the application of Fibonacci in trending markets. Just, in this case, we’re looking at a very long-term trend. On the below chart, a number of key inflections, taken from the weekly chart, are highlighted.

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Dollar Index (DXY)weekly chart (2015-2020):

DXY weekly chart

Chart prepared by James Stanley; USD, DXY on Tradingview

On the above chart, notice how the inflections marked by blue or red boxes led to moves that lasted for weeks and, in some cases, months later. The first major inflection, in early 2018 after that major move had completed, marked a full trend change as a previously threatening bullish trend was largely erased in the two years after that 50% marker was tested.

The 23.6% retracement soon became resistance, shown by a red box above; and that inflection helped to reverse a trend that had just jumped up to a fresh yearly high. That reversal lasted a little over a month until, eventually, buyers stepped back in to eventually drive prices back-above that level; after which the 23.6% marker was incorporated as support.

That same level was re-engaged with less than two years later, as USD was dropping following the March 2020 spike; and this was a mere speed bump as sellers continued to push until, eventually, the 38.2% retracement came into the picture.

For the trader merely following the weekly chart, or with shorter time frames – they may not have even knew that this move nor these levels existed. But to the trader harnessing the potential of longer-term charts into their analysis, with tools such as Fibonacci retracements, that perspective could’ve allowed for some very interesting data points that could be incorporated into strategy.

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Fibonacci on Long-Term Charts: Summary

The strategy applied above purely conveys a simplistic approach to Fibonacci execution on long-term charts. Differing time frames may be used on different markets. There are no concrete guidelines to how this should be implemented. The takeaway from this strategy is the importance of using the bigger picture to generate a more complete view. This is merely one method that can be used as part of a larger strategy in conjunction with other technical indicators or price action techniques.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.