Fibonacci Fans

What is it?

Fibonacci fans are based on the same principles as Fibonacci retracements but have more in common with Gann lines and Speed Resistance Lines (SRL). As with Fibonacci retracements, Fibonacci fans is based on the mathematical relationships between the numbers in the Fibonacci sequence. However, Fibonacci fans plot trendlines rather than support and resistance lines.

How is it calculated?

The Fibonacci fan lines are determined by applying the key Fibonacci ratios to the significant high and low points that mark the start of a trend. The key Fibonacci ratios are determined by dividing a number in the sequence with another number that follows it. Thus:

• The first ratio of 61.8%, which is the inverse of "golden ratio" or the "golden mean" (i.e., the inverse of 1.61%), is found by dividing a number in the sequence by the number that immediately follows it. For example: 8 ÷ 13 = 0.6153, 34 ÷ 55 = 0.6182 and 55 ÷ 89 = 0.6179.
• The 38.2% ratio is found by dividing a number in the sequence by the number that follows two places to the right of it. For example: 8 ÷ 21 = 0.3809, 21 ÷ 55 = 0.3818 and 55 ÷ 144 = 0.3819. It is also found by subtracting 0.618 from 1 (1 – 0.618 = 0.328).
• And the 23.6% ratio is found by dividing a number in the sequence by the number that follows three places to the right of it. For example: 8 ÷ 34 = 0.2352, 21 ÷ 89 = 0.2359 and 34 ÷ 144 = 0.2361. It is also found by subtracting 0.382 from 0.618 (0.618 – 0.382 = 0.236).
• In addition to these three ratios, some traders also use a 50% ratio. Although this is not a Fibonacci ratio, it still appears to be a significant level that the price movement adheres to.

Once the start of the trend has been identified the range from the significant high and low that marks the start of the trend is divided by these Fibonacci ratios and lines are drawn through these points, starting from the high if the current trend is a down trend or the low if the current trend is an uptrend.

How is it used?

Like other support and resistance indicators, Fibonacci fans is based on the principle that the market will retrace a portion of the previous movement before continue in the direction of the trend. This is based on the fact that the financial markets do not trend in a straight line. Instead the trend is interrupted by retracements that tend not to exceed the previous wave.

When using Fibonacci fans, a technical analyst divides the previous wave in the direction of the trend by the Fibonacci ratios mentioned above. Trend lines are then drawn from the starting point through these levels and are used as possible support levels if the larger trend is an uptrend, or as possible resistance levels if the larger trend is a down trend. These thus become places at which the trader could buy in a larger uptrend or sell in a larger down trend.

Chart Example

The following is a 15-minute chart of the GBP/USD with a Fibonacci Fan drawn from low at 12:15 on May 20, 2013 to the high made later that day at 21:00. Notice how the subsequent retracement initially met support at the 38.2% and then again at the 61.8% line, and how once broken, the 50% support line became resistance to further buying.

Fibonacci Fan on a 15 Minute GBP/USD chart

Wealth Warning

Trading equities, options, derivatives, currencies, commodities or any other financial security can offer significant returns BUT can also result in significant losses if the market moves against your position. It requires a strong commitment to skill development, knowledge acquisition, and emotional control. It should be treated as a business with a clear business plan, a risk analysis, and set of attainable goals. The risk associated with trading the vagaries of the stock markets is probably the most important consideration as it has a profound effect on emotional control. You should not trade the stock markets with money you cannot afford to lose as there is considerable exposure to risk in any stock market transaction.

Furthermore, the past success of any trading method, strategy, or system is only indicative of future success. Under no circumstances should past success be construed as a guarantee of future success!

Related Indicators:

Fibonacci Retracements

Fibonacci Retracements

Fibonacci Retracements is a popular support and resistance indicator based on the proportional relationship between the numbers in the Fibonacci sequence. The Fibonacci sequence is the sum of the two numbers beginning with 0 and 1. The key ratios between these numbers are: 161.8%, 61.8%, 38.2% and 23.6%. These ratios, and the 50% ratio, are used to divide a price movement in a wave, and plot horizontal lines to determine where a retracement could find support or resistance before the trend resumes.

Fibonacci retracement levels are ...

Speed Resistance Lines (SRL)

Speed Resistance Lines

Speed Resistance Lines (SRL) is a support and resistance indicator that was developed by Edson Gould. It can be used to identify possible levels at which the price action might encounter support or resistance, which makes it possible to determine possible price targets and possible re-entry levels. The SRL is similar to Fibonacci Fans except that it uses 1/3 and 2/3 levels rather that the Fibonacci ratios to produce trendlines.

The two speed lines drawn using the 1/3 and 2/3 levels mark two possible support levels in an ...