Information is not investment advice
Fibonacci fans is a tool that will help you to analyze trends.
Fibonacci fans are sets of trendlines drawn from a high or a low of the price chart through a set of points dictated by Fibonacci retracements. Just like with Fibonacci retracement, you need to choose the tool and connect a swing high and a swing low with a base line.
Then an “invisible” vertical line, equal to the vertical distance between the high and the low, is drawn from the second extreme point to the level of the first extreme point. Three trend lines are then drawn from the first extreme point so they pass through the invisible vertical line at the Fibonacci levels of 38.2%, 50.0%, and 61.8%.
Fibonacci fans lines can act as support or resistance pinpointing areas at which the price may reverse. As soon as a correction starts, Fibonacci fan will allow you to see the areas to which you should pay special attention.
- Corrections (pullbacks) to 38.2% Fibonacci are considered shallow and point at the continuation of the main trend.
- A pullback to 50% is moderate and can be observed quite often.
- A correction to the so-called “golden ratio” of 61.8% is more rare, but this level of support/resistance will be the strongest of the three.
Notice that because of the properties of the fan, the further out the lines extend (in time), the more sensitive they are to exact placement of the two marker points. This means a small change in placement of either of the marker points can result in large movements further out in the extension lines. The fan usually becomes less accurate the further out it extends. When the price is no longer responding to the support or resistance areas of the fan, it is disregarded (this can happen when it extends outside of the active chart area).
Sometimes technical analysts plot several Fibonacci fans using different waves of the prices. This allows to place potential reversal areas of the price with greater precision.
2021-06-22 • Updated
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