Fibonacci numbers are popular in the online trading world. They can confirm the wave theory of Elliot, so followed by many forex players, serve to determine the beginning and end of the corrective movement of prices. In addition to the Fibonacci levels and placing orders according to its signals, traders can get acquainted with other tools based on Fibonacci such as Fibonacci fans which we will look into in this article
What are Fibonacci Fans?
Fibonacci fans are sets of trendlines drawn from a trough or peak through a set of points dictated by Fibonacci retracements. Traders can use the lines of the Fibonacci fan to predict key points of resistance or support, at which they might expect price trends to reverse.
The construction of the Fibonacci Fan often causes difficulties due to the complexity of the in its principle of action. All you need is to understand drawing Fibonacci Fan trendline and the rest resembles a lot with the traditional Fibonacci retracement.
The basis of the Fibonacci Fan is the Fibonacci grid, or rather, the three levels 38.2%, 50%, 61.8%. We look at the USDCAD chart:
At point A, a “bullish” trend begins. Rising prices continue to point B, and then we see the beginning of the correction. At this point, you should build a Fibonacci fan to determine the levels of the corrective movement.
From point A to point B, we stretch the Fibo grid and draw a trendline from point B crossing the grid lines. On the chart, it is shown in black. From point A through the intersection of the trendline with the grid levels of 38.2%, 50%, 61.8%, we get the fan rays. These lines become the potential support and resistance areas of the end of the correctional movements.
How to use Fibonacci Fans?
It is logical to assume that the price, having pushed off the Fibonacci Fan line by 38.3%, may continue in the direction of a trend. Prices may further retrace and touch the 50% line in some cases. The correction can end here and the trend may continue again. However, we can already talk about a slight weakening of the trend. Stopping the correction at the level of 38.2% would signal a fairly strong trend. Next, we see the next correctional wave, which pushed off from the level of 61.8%.
The trend is considered weakening. There is a possibility of change in the direction of price movement. Placing a limit order around 61.8 can give a successful trade. The stop-loss can be placed just above/below the last swing area. This can provide a favourable risk to
reward ratio. However, notice that most of professional trader consider Fibonacci Fans as invalid if the price reaches the 61.8 level. They consider redrawing the Fibonacci Fans in such a scenario.
Professionals also caution against using the Fibonacci Fan directly to determine retracement points. Firstly, there is an error in constructing fan lines; secondly, signal interpretation is subjective. In addition to the fan line, the traders must evaluate several more levels determined using other technical analysis tools. The combination of several indicators can give more accurate signals to open a position.
Fibonacci Fan trading strategy
We are going to discuss a pullback strategy in the direction of trend as this gives higher probability of success with great risk to reward ratio.
Fibonacci Fan buy strategy
- You can buy an asset in an uptrend if the price reaches 38.2 or 50.0 level.
- Take confirmation from 50 SMA. The price must be above the 50 SMA.
- Stop-loss can be placed slightly below the 50.0 level.
- You can exit the trade at point B (the top from where the price starts retracing) or simply place the take-profit twice the size of your stop-loss.
Fibonacci Fan sell strategy
- You can sell an asset in a down trend if the price reaches 38.2 or 50.0 level.
- Take confirmation from 50 SMA. The price must be below the 50 SMA.
- Stop-loss can be placed slightly above the 50.0 level.
- You can exit the trade at point B (the bottom from where the price starts retracing) or simply place the take-profit twice the size of your stop-loss.
Fibonacci Fan conclusion
I would prefer to use the majority of technical indicators such as Fibonacci Fans on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels or a particular indicator value has been reached.
Fibonacci Fans is just one indicator amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.
Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.
The methods of implementing Fibonacci Fans into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.
Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.
If you would like to practice trading with Fibonacci Fans, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.