Additional Fibonacci tools in MT4
The main Fibonacci indicator is retracement levels. If the trend is taken as a unit, by stretching the grid along its extrema, you can find intermediate levels of resistance and support. The price can move between them for some time, forming a local flat. Or form a rebound in the correction with the continuation of the main direction of the price. Also, correction levels can be used to search for a change in the direction of the trend – if the correction passes key levels, approaching 100%, most likely the trend has changed direction.
The correction levels in MT4 can be called as follows: Insert / Fibonacci / Lines. There are other Fibonacci tools here that you will learn more about.
Fibonacci sequence indicators
- Expansion… Fibonacci tool, often used to identify long-term targets. If the scale of correction levels is limited by the extremes of the current trend 0 – 100%, then the expansion builds the predicted levels 161.8%, 261.8% on the basis of the coefficients of the mathematical sequence.
The extension building principle is based on the Elliott wave theory. It assumes the presence of 5 waves of the main trend (3 main and 2 corrective), then three waves of a new trend in the opposite direction (2 main, 1 corrective). The extension construction theory assumes that the instrument is built on three points: the extremes of the first 2 waves, the 161.8% level shows the probable end point of the third wave. However, this is just a general description of how the extension is applied.
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The extension is built on three points of waves 1 and 2. The total of waves of the first major trend is 7. Despite the fact that the 3rd wave ended much earlier than the theory suggests, the extension has built strong levels of resistance and support. This is an example of the fact that there is no perfect working tool, but if you experimentally learn how to correctly apply the grid, Fibonacci tools will be able to predict the levels of resistance and support relatively accurately.
- Arcs… Another Fibonacci tool, which is built as follows:
- The starting point is the beginning of the trend. Without releasing the mouse, drag the line to the second extreme point.
- For the main line, not the current trend is used, but the previous one.
In practice, the indicator is rarely used, as it gives more false signals than others from the same group.
- Fan… An indicator that builds impulse and correction levels diverging from one point.
You will learn more about this Fibonacci tool from the Fan as an Alternative to Classic Levels review.
- Time zones… The indicator is plotted not by price movement, but by time periods. Represents vertical lines marked in accordance with the Fibonacci number series. It is believed that a price reversal is most likely when approaching the vertical level of the indicator, although this point is controversial. Included in MT4, but not included in a number of other trading platforms.
- Channels… This is the only indicator that is in another group – Insert / Channels / Fibonacci. It somewhat resembles retracement levels. In appearance, these are parallel lines with a distance in accordance with the Fibo coefficients, defining the price movement zones. They differ in that they are plotted using three points (and not two, like correction levels) and can have any slope.
Channel construction principle:
- Two points are placed at local trend extremes. The third point is placed at the extremum of the local correction. On an uptrend, the line is drawn at the lows, on a downtrend, at the highs.
- The line is fixed by double-clicking the mouse.
- Using the appeared control points, the channels are stretched so that the two extreme lines form the primary channel range. In other words, the first channel should be formed by local extrema and correction.
All of these tools have an auxiliary purpose. The most frequently used strategies in strategies are correction levels – in scalping and swing trading, extension levels – in long-term strategies to set take profit. We recommend you to work with these Fibonacci tools on a demo account – this will help you consolidate the theory and better understand the essence of the indicators. If you have any questions, ask in the comments!