Fibonacci Fans Charting Technique

Fibonacci Fans are a charting technique based on Fibonacci ratios. It is widely exploited by traders to predict future support and resistance levels for a stock or other financial instruments and also to analyze the speed of a trend. Typical Fibonacci fan chart consist of 3 lines, but the trader can increase the number of lines if necessary. Like Fibonacci arcs, Fibonacci fans can be created for both short-term and long-term bullish and bearish trends.

Many advanced trading systems allow traders to plot Fibonacci fans in price charts. The idea is simple; first a trend line is created connecting two extreme points; usually connecting highest high and lowest low in a given period. Then an invisible line is plotted vertically from the second extreme point (vertically from highest high point for a bullish trend and from lowest low point for a bearish trend). Then three lines are drawn from the first extreme point intersecting the invisible vertical line at key Fibonacci ratios like 38.2%, 50% and 61.8%. The number of lines can be increased by using more Fibonacci ratios like 23.6%, 76.4%, etc.

Generally, when a trend crosses a Fibonacci fan the line becomes support level for bullish trend and resistance level for bearish trend and the next Fibonacci line becomes resistance level (bullish trend) or support level (bearish trend). Fibonacci fans offer better results when used in conjunction with Fibonacci arcs.

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