The Chartist: Fibonacci Time Series and Retracement Levels

Life often happens when you’re at the right place at the right time—the dream home you find, the life-changing gig you land, the winning lottery ticket you buy. In a way, nailing a trade is similar. Except it’s more about getting in at the right price at the right time.

There’s no doubt luck can play a role. Yet, more often than not, it’s your analysis that can bring more potential trading opportunities.

Price and Time

You’re probably familiar with Fibonacci (Fib) retracement and extension levels. Traders often use them to help identify potential trend reversals. These retracements and extensions typically measure changes in price and are displayed as horizontal lines at different levels on the y-axis.

There are several other ways to apply Fib numbers—arcs, spirals, fans, and more. One that might help spotting pivoting price trends is Fibonacci Time Series. Think of it as adding another dimension to retracement levels. Fib Time Series measures change in time along the x-axis—vertical bands with days or periods equal to numbers in the Fibonacci sequence. 

So, when you combine Fib retracements with Fib Time Series, you can examine price movement through the lens of time and price.

How Does This Work?

When you only look at Fib retracements, your focus tends to be on a price bounce either above or below different levels. Sometimes price can bounce around these levels several times before making a directional move. And that can be frustrating for an option trader who’s trying to decide which strike price and expiration to use.  

Now, when you add in the time series, you might get a better idea of when price trends could potentially reverse. 

Let’s see how this works.

Fire up your thinkorswim® platform and enter the symbol of a stock you’d like to follow. Next, find a low and high point on the chart (see figure 1). Select the Fibonacci Time Series icon. Use the low or high as a starting point and the corresponding high or low as an end point. Remember to go from left to right.

Notice that the Fib Time Series doesn’t necessarily identify every price reversal. But if you isolate the areas when price and time came together, price bounced off a retracement level, revisited it (sometimes more than once), and the revisit took place at one of the vertical lines, more often than not the trend reversed (see labels 1, 2, and 3 on figure 1). 

As with all things trading and chart analysis, there are no guarantees. Yet, using Fibonacci Time Series and retracement levels may be able to help you simplify your options strike-and-expiration decisions. Consider these drawing tools as one of many guides. An earnings report, economic data, or a news event could naturally throw prices out of whack. Which is why, even when a trading setup looks ideal, it’s important to have money-management strategies in place.