Fibonacci Fans

Fibonacci Fans

Having had a look at speed resistance lines in forex charts – their purpose as an indicator being to provide information on possible levels of support/resistance in a retracement following a trend and also the rate of retracement – we probably ought to check out Fibonacci fans, similar method, looking to supply a similar answer, given an initial trend….

A picture being worth a 1000 words etc. here’s the deal on a real chart.

Having found a trend line, the (here) 2 outer fan lines are drawn from the origin to intersect the perpendicular of the peak at the 2 Fibonacci retracement levels, 0.382 and 0.618, or 38.2%, 61.8% on the chart. (If you’re not up on Fibonacci calculations the background is here – Fibonacci retracement). There’s a 3rd fanline (here, black) at the secondary Fibonacci root 0.500.

The interpretation is simple – a price finds (trailing) support/resistance at the fan lines. It should/may bounce between these 2 containments for as long as the trend continues.

Naturally, the use of Fibonacci fans rest heavily on the principles of Fibonacci retracement in general – if you don’t entirely buy into this as a viable forex technique when taken out of the classroom – as I for one, do not – their use is, well, dubious… but, there’s room in this world – you’re always encouraged to think differently…

Use of Fibonacci Studies in Technical Analysis

As the series of Fibonacci numbers continues, it's interesting to not that any given number is 1.618 times greater than the preceding number and 0.618% of the next number. For example:

(34/55 = 55/89 = 144/233 =0.618) (55/34 =89/55 =233/144 =1.618), and 1.618 =1/0.618.

These same properties of the Fibonacci series occur throughout nature, science and math. The number 0.618 is often referred to as the "golden ratio", since it is the root of the following polynomial: x^2+x-1=0 which can be rearranged to x= 1/(1+x).

So, that's were the fib 0.618 comes from. The other fibs 0.382 and 0.5 commonly used in technical analysis have a less impressive background, but are just as powerful when used in a Technical analysis.

0.382=(1-.618)=(0.618*0.618)

and 0.5 is the mean of the two numbers.

Other neat fib facts (0.618*(1+0.618)=1 and (0.382*(1+.618))=0.618.

Use of Fibonacci Studies in Technical Analysis

Technical Analysis commonly involves the use of Fibonacci numbers with or without any knowledge of the Elliot Wave to help determine potential resistance or support and price objectives. Retracements of 38.2% commonly suggest that the prior trend will continue, 61.8% retracements, generally mean a brand new trend has began to establish itself. Indecision is implied with a 50% retracement, while during healthy trends, 38.2% is considered natural retracements.

ABC's

To determine the price objectives for a natural retracement at 38.2% you simply add the magnitude of the previous trend to the retracement during an upward trend in the market. And, subtract it during a downward market trend. Usually, after a retracement at 38.2%, the stock should peak the prior swing point (B) on heavier volume. It there is no volume, the magnitude of the move is usually diminished, especially if the volume is very low.

A-B =C-D when B-C =38.2% of A-B

Topics related to Fibonacci Studies:

Algorithm of Fibonacci analysis Fibonacci biography and history facts Fibonacci calculator Fibonacci charting Fibonacci curve Fibonacci equation Fibonacci extensions Fibonacci function Fibonacci golden ratio Fibonacci quotes Fibonacci rectangle Fibonacci software Fibonacci stocks Fibonacci trader Fibonacci triangle Fibonacci Arcs Fibonacci Fans Fibonacci Retracements Fibonacci price projection Fibonacci Spiral Fibonacci Time Goals Fibonacci Time Zones Fibonacci phi-Channel