Fibonacci Time Zones are a series of vertical lines. Traders use them to break down a certain time period into smaller ones whose lengths are consecutive Fibonacci numbers.
The end of each smaller period might signify an important change in price.
Unlike the other charting techniques, Time Zones focus on the timing, rather than the price component of price movements.
With this technique, a unit time interval is chosen as a reference, and vertical lines are plotted at Fibonacci intervals of 1, 2, 3, 5, 8, 13, 21, 34, etc., where new support or resistance levels can be expected
The interpretation of Fibonacci Time Zones involves looking for significant changes in price near the vertical lines.
Fibonacci time zones are used in the Fibonacci time projection, one of the four most commonly used Fibonacci studies for technical analysis.
A Fibonacci time zone is generated by first taking some time interval on a market’s chart as a base increment of time, anywhere from one hour to one day. The most useful are generated by choosing a base interval described by the time between two market bottoms or tops.
The base interval is then multiplied by the golden ratio, 1.618, in order to determine the length of time from the end of the base interval to the first Fibonacci time zone.
Future Fibonacci time zones are generated by multiplying each successive interval between Fibonacci time zones by 1.618.
Fibonacci time zones are, in theory, the points at which large market events can be expected, from the reversal of a current price trend to a large change in price in the direction of the trend.
In practice, Fibonacci time zones do have a large measure of predictive power (something like 70%), but on occasion, large price events can occur between Fibonacci time zones, even though the time zones usually still correspond with price events of some size.
Because of this occasional inaccuracy, Fibonacci time zones and Fibonacci time projection should only be used as guidelines, and should also only be used in conjunction with other technical analysis tools.