The Fibonacci fan is a combination of trendlines plotted from a single point and distant from each other based on Fibonacci ratios. Fibonacci fans share the main idea with Fibonacci retracements: using Fibonacci ratios in order to predict future support/resistance levels.
On an uptrend period, it is suggested that the main trendline be plotted from the bottom to the top so that retracement lines are placed below it; these lines might predict potential support levels.
Conversely, on a downtrend section, the fan is plotted from the top to bottom, and the retracement lines appear above the main trendline, serving as potential resistance levels.
Fibonacci fans’ name derives from the fanlike appearance of the three trend lines shown.
The Fibonacci fans are drawn using typical tops or bottoms. The three Fibonacci fans project into the future with slopes at 38.2, 50, and 61.8% (additional levels are also available). As the daily prices pass these three fans, we make predictions about future price movements based on whether there appears to be price resistance or support at these intersection points. If the prices hold at the fan line, there is support there, if they quickly move through the fan line, then you will not see support until the next fan line is met.
Fibonacci fans are among the four most popular Fibonacci studies, used to predict levels of support and resistance in a market.
Fibonacci fans are generated by first finding the high and low of the market. An invisible vertical line running from the high price level to the low price level is drawn at the rightmost point, whether high or low.
Three lines are then drawn from the leftmost point through the invisible vertical line, crossing the line at 38.2%, 50%, and 61.8% of the total distance. (These are the classic Fibonacci study percentages, but other Fibonacci percentages are sometimes used.)
These three Fibonacci fan lines predict strong levels of support and resistance for the market in the near future.
The Fibonacci fan also predicts the range of a market for a short period of time, as prices tend to “bounce” between the lowest and highest of the three Fibonacci fan lines, occasionally hovering or rebounding from the 50% line at the middle of the projection. Several traders also use Fibonacci fans in conjunction with Fibonacci arcs.
Both Fibonacci studies are drawn on the same chart, and the points at which the projections cross are considered to be extremely strong levels of support or resistance.
With fans, an invisible vertical line is drawn through the second extreme point in a price movement and trend lines are drawn from the first extreme point to intersect the invisible vertical line at the levels of 38.2%, 50%, and 61.8%.
As with arcs, the trend lines from the “fan” of three new trend lines will project into future points on the graph where support or resistance levels will likely appear.