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A Fibonacci fan is a line chart that uses Fibonacci ratios, based on time and price, in order to illustrate support and resistance levels. Some traders use Fibonacci fans and other Fibonacci methods as tools for analyzing levels of support and resistance in financial markets, such as the stock, futures and currency markets. Other Fibonacci techniques used by traders can include retracements, arcs, extensions and time zones. Fibonacci methods attempt to predict when changes to financial market trends will occur.
Fibonacci fan charting techniques can demonstrate the speed of a trend’s movement – from low to high. Three diagonal Fibonacci fan lines are usually used to build a Fibonacci fan chart. These lines help show key points of support and resistance.
Creating a Fibonacci fan chart requires you to first draw a trend line between two points on the chart. Typically, these two points represent a high and a low during a specified time period. Next, the vertical distance between these two points is divided by three primary Fibonacci ratios – 38.2%, 50% and 61.8%. The three resulting numbers each signify a level within the vertical distance and are included as points on the chart. Three Fibonacci fan lines are then drawn from the leftmost point on the chart to each of the three numbers that represent the primary Fibonacci ratios.
In the chart, support levels represent the point at which a buyer influences prices and keeps them from dropping. On the other hand, resistance levels represent the position at which a seller controls prices and stops them from increasing. A deal may take place when the buyer and the seller agree to conduct a transaction at a mutually agreed upon price. Traders generally believe that prices will increase when support levels are at play and decrease when resistance levels are in motion.
Traders often expect prices to drop if the prices on the Fibonacci fan chart drop below the trend line. This drop is expected to continue until the next trend line level is reached. Conversely, if prices increase to meet a trend line, the trend line is expected to serve as resistance. If that price is met, the next highest trend line is the next level of resistance.
Fibonacci fan charts are not foolproof market predictors. In addition, they often prove difficult for traders to read and interpret. They can also be time-consuming to chart out. As a result, many traders use Fibonacci fans or other Fibonacci tools in combination with other trend-predicting methods.