Fibonacci Fans Indicator Explained

Definition

Fibonacci Fans, otherwise known as Fibonacci Projections, share some kind of similarity to Gann Lines and Angles.

They are displayed on the charts by following the same principles of drawing the Fibonacci retracement points: drawing a trendline from one price extreme to another, either from a peak to a trough, or from a trough to a peak. The trace also produces a vertical line through the second price extreme level. Three trendlines then fan out from the first price extreme point, passing through the vertical line at the 23.6 %, 38.2 %, 50.0 %, 61.8 %, 76.4%, or 100% Fibonacci levels.

Fibo_fan1

So we have the following at the end of the trace:

  1. Rising fan lines which pass from a trough along the various retracement levels to the peak. These fan lines serve primarily as support levels for rising prices, or resistance when a particular line has been broken downwards.
  2. Falling fan lines which head down from a peak along the retracement levels and get down to a trough. These fan lines can serve as resistance levels .

Components of the Fibonacci Fan

Fibonacci fans are trend lines which extend in the shape of a hand-held fan either upwards (in an uptrend) or downwards (in a downtrend). These trend lines correspond to the Fibonacci retracement levels. The only difference between the Fibonacci fans and Fibo retracement levels is the direction of the lines. Two Fibonacci fans are recognized:

Rising Fibonacci Fan
The fan lines are seen as follows:

  • Fan Line 1: Price trough to 38.2% retracement level
  • Fan Line 2: Price trough to 50% retracement level
  • Fan Line 3: Price trough to 61.8% retracement level

Additional fan lines can be traced when the trader makes the adjustments and exercises the option to add these levels using the indicator editing tool (Ctrl + I).

Falling Fibonacci Fan
The fan lines are seen as follows:

  • Fan Line 1: Price peak to 38.2% retracement level
  • Fan Line 2: Price peak to 50% retracement level
  • Fan Line 3: Price trough to 50% retracement level

Additional levels can also be added using the indicator editing tool.

Indicator Settings

The Fibonacci fans tool is listed  on the MT4 among the Fibonacci group of indicators. To attach it to the MT4 chart, click on Insert -> Fibonacci -> Fans

Fibo_fan2

The modifications to the indicator can be either to increase or reduce the retracement levels as well as changing the colours and the thickness of each line for better visibility.

Usage of the Fibonacci Fans in Forex Trading

The primary use of the Fibonacci Fans is for support and resistance trading. There are several opportunities to trade using each Fibonacci fan line as entry and exit levels. The beauty of this system is that these Fibonacci lines can promote trade in both directions: long trades in a rising fan and short trades in a falling fan.

We will now demonstrate the use of the Fibonacci fan in setting different kinds of trades in different scenarios.

Trade Example

The trade example that is to be discussed here is an example of how the Fibonacci rising fans can be used to create a series of sequential entry trades and exits in a long trend. Recall that we only trade in the direction of the trend, so the only trades executed here are long trades. The only exception is where there has been a clear trend reversal, in which case some other form of confirmation needs to be obtained before trading in the reverse direction.

Fibo_fans

This is a typical trade situation where we identify up to 5 entry points. Ideally, the trace is started from trough to peak and the lines fan out into the future, so trades 2, 3, 4 and 5 are executed only with sound entry principles, one of which is that the price action must not have closed below the fan line in question or the trade would not be tenable. The price action must bounce on the fan line, showing that the line is acting as a support for the expected long entry.

Point 1 is the first trade point, with exit at 1a. Point 2 is the 2nd trade area with exit at point 2a. Points 1 and 2 are located on the 38.2% fan line. Point 3 served as the next entry area because price action broke below the 38.2% fan line, but bounced on the 50% fan line where point 3 was located. The next exit for point 3 is ideally at the broken 38.2% line. Point 4 was also a valid entry since price did not break below this area, with point 4a being the exit point for the same reasons given for point 3. A bearish candle broke below the 50% line, rendering the next trade entry area of point 5 being the 61.8% fan line. The next exit is at the next available resistance, now provided by previous support of 50% line at 5a.

Conclusion

It is not all the time that indicators can pull off such easy pickings in forex. Remember to make all trades on the daily chart, which is where the true trend lies. It is essential that you practice how to trade each setup on a demo account before using the indicator to trade real money. Also pay attention to risk management.

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