4.20 Trading with Fibonacci Fan
Fibonacci Fan is another version of Fib retracements and similar to the arcs, the Fibonacci fan also bring in the time element into the picture. The support and resistance levels defined by the fan do not remain flat but they change with the time.
Logic behind the Concept of Fibonacci Fan
The logic behind the concept of Fibonacci fan is that as the time lapses, the possibility of greater retracements diminishes. Lesser momentum of the retracement is expected to cause shallower retracements.
Let’s say during a downtrend we are working with the daily chart and the consolidation started a couple of days back. The momentum has been very slow and during the past couple of days the price did not consolidate much. The hesitation indicated that the consolidation may not be much and a resistance may up come much sooner than the flat retracement levels drawn. Opposite of this may prove to be true during a downtrend. This phenomenon is taken into account in the design of the Fibonacci Fan.
Construction of Fibonacci Fan
A Fibonacci Fan also has 38.2%, 50% and 61.8% retracement levels. However unlike Fibonacci retracements where the resistance or support levels are calculated by multiplying the "difference of the high and low" by Fibonacci ratios, the Fan are drawn as follows:
Consolidation during an uptrend
During an uptrend the support lines of Fibonacci fan is constructed by joining the low or the trough to the intersection of the Fibonacci retracement lines for 38.2%, 50% and 61.8% levels with the vertical drop line from the high to the level of the low. The following diagram explains it visually:
Consolidation during a downtrend
During a downtrend the resistance lines of Fibonacci fan is constructed by joining the high or the peak to the intersection of the Fibonacci retracement lines for 38.2%, 50% and 61.8% levels with the vertical line from the low to the level of the peak. The following diagram explains it visually:
As the above diagrams show, instead of flat horizontal levels, the support and resistance levels derived by the Fibonacci fan incline upward or downward with the time. A retracement during an uptrend will see the support levels inclining upwards and during a downtrend the resistance levels would incline downwards.
Drawing the Fibonacci Fan on Forex Chart
- Find the low (trough) and high or the peak point during a trend. Exactly same as Fibonacci retracements, you can make use of Swing Highs & Swing Lows, resistance & supports, trend-lines and candlestick reversal patterns to identify the zones where a retracement or consolidation is expected.
- Select the "Fibonacci Fan" tool from the trend-lines on your chart.
- Click on the low during an uptrend and drag the cursor to the high and click there. During a downtrend you need to click on the high first before dragging the cursor to the low and clicking there.
- You will Japanese fan like lines drawn for 38.2%, 50% and 61.8% supports, during uptrend and 38.2%, 50% and 61.8% resistance lines, during a downtrend.
Trading with Fibonacci Fan
Trading with Fibonacci Fan is same as the normal retracement levels. When a consolidation takes place during an uptrend, the lines of Fan tend to act as support levels and offer buying opportunities. Similarly when market corrects itself during a downtrend, lines of the Fibonacci Fan tend to act as resistance levels and offer entry zones for short-selling.
The following Forex chart illustrates the above:
Please also note that similar to any support and resistance levels, once a breakout takes place, the previous support zones tends to act as resistance zones and vice-versa.
- Introduction to Fibonacci Fans