Similar to the Bollinger Bands, the Fibonacci Bands consist of a moving average as the middle band, they differ in the number of upper and lower bands while Bollinger Bands have only one upper and one lower band, Fibonacci Bands feature three upper and three lower bands.
The construction of Fibonacci Bands involves multiplying the ATR by specific Fibonacci factors (1.6180, 2.6180, and 4.2360) and for the upper bands, the results of these multiplications are added to the middle band, while for the lower bands, the results are subtracted from the middle band. This process creates a set of bands that adapt to market volatility while incorporating the distinctive characteristics of the Fibonacci sequence.
The Fibonacci Bands indicator consists of two standard indicators, the Average True Range and the SimpleMoving Average.
The Average True Range (ATR) serves as a gauge of price volatility used with a simple moving average indicator, the upper and lower bands become responsive to price fluctuations, promptly adapting to periods of both high and low volatility. This approach allows for a dynamic representation of market conditions, ensuring that the bands reflect the varying degrees of price movement.
The following formula is used to create the indicator values.
ema = exponential moving average
atr = average true range
- Upper Band1 = ema + 1.62 * atr;
- Upper Band2 = ema + 2.62 * atr;
- Upper Band3 = ema + 4.23 * atr;
- Upper Band4 = ema + 1 * atr;
- Lower Band1 = ema - 1.62 * atr;
- Lower Band2 = ema - 2.62 * atr;
- Lower Band3 = ema - 4.23 * atr;
- Lower Band4 = ema - 1 * atr;
Bollinger Bands are not directly related to Fibonacci, but they are another popular technical indicator used to analyze volatility and potential price movements. They consist of three lines: a simple moving average (typically over 20 periods) in the centre, and two standard deviation bands (one above and one below the moving average).
How to Trade Using Fibonacci Bands?
Monitoring the price action in the proximity of the extreme bands (both lower and higher) stands out as an excellent method for identifying trend reversals. Usually, when prices stray beyond the bands for a few bars and subsequently return inside them, markets tend to reverse. Following such reversals, markets often exhibit a tendency to trade from one extreme band to the opposite end of the extreme bands.
cTraders Fibonacci Retracement Tool
When employed within the cTrader platform, the Fibonacci retracement is a charting tool that utilizes technical analysis to pinpoint support or resistance levels using percentage values. By employing lines, the Fibonacci retracement levels illustrate the potential locations of support and resistance levels on the chart.
Read more about the Fibonacci tool
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