Fibonacci Fan: rules of use and market entry tactics
The legacy of the great Italian mathematician Leonardo of Pisa, better known as Fibonacci, is still actively used in all spheres. Trading on financial markets is not an exception. Tools based on numerical sequences of Fibonacci are very popular among traders. However, not everyone knows how to use correctly the built-in MT4 terminal Fibonacci indicators. And if a grid of Fibonacci extensions While almost everyone knows how to "stretch", very few people use the Fibonacci fan, which has somewhat different specifics of construction. Let us also join this effective tool.
The concept and meaning of the Fibonacci fan
The Fibonacci Fan is a trading tool based on the Fibonacci numbers constructed by coefficients. The lines, which are supports and resistances, emerge from one point and resemble a fan, hence the tool got its name.
You can set the Fibonacci Fan on the price chart, as well as any standard tool of the MetaTrader 4 platform, from the Toolbar or the Main Menu.
To properly build a fan, you must first determine the price maximum and minimum for the selected period (taking into account the trend). The main line (trend line) is drawn from the minimum to the maximum in an uptrend, and from the maximum to the minimum in a downtrend.
By default, three lines corresponding to Fibonacci numbers of 38.2%, 50% and 61.8% (added as 0.382, 0.50 and 0.618, respectively) are plotted from the initial point. The principle of these lines is similar to the Fibonacci levels - they are regarded as the levels of the probable price rebound.
Unlike the horizontally placed Fibonacci levels, the fan lines are placed at an angle to each other, which is a definition of additional correction levels. Because of this, working with the fan is somewhat more complicated than working with conventional levels, because it requires constant price reconciliation.
The Fibonacci Fan works on the basis of one of the key principles of technical analysis - after a fall or rise, price will usually return to the initial level. At the same time it will definitely cross support and resistance levels. If after corrections price crosses the levels and the movement in the direction of the trend continues, then a fan correction is necessary, so the local extremum has changed.
Using the Fibonacci Fan in Trading
The order of using the Fibonacci Fan in trading is as follows:
The Fibonacci fan is plotted on the uptrend according to the rules described above.
The price breakdown of the first line of the fan 38.2% from above downward is a signal of the beginning of the correction. That is, there is a probability that the price can bounce from this or subsequent lines and continue the current trend.
The price may oscillate between the lines 38.2% and 61.8% for some time. The price crossing the level of 61.8% may signal a possible trend reversal. It should also be taken into account that the breaking point of the line 61.8% may be the beginning of a new trend, as well as the correctional bottom of the current trend.
Often, such signals are false. To filter them, you can add another level 0.764 (76.4%) to the fan. To do this, select the main line of the fan by double-clicking, select the item "Fibo Fan properties" via PCM and set the desired level in the tab "Fibonacci levels".
If the price crosses this level, the probability of forming a new trend increases significantly.
The tactic of using the Fibonacci fan when entering the market
The use of the Fibonacci fan implies two tactics for entering the market
Tactic #1. Entering a position by trend.
The signal for entering a long position is a rebound from any line of the fan and the closing of the bar (candle) above the line 38.2%.
Warrant stop loss is placed at the local minimum of the correction or the level of 61.8%.
Tactic #2. Placement of pending orders.
Without waiting for the lines to cross, a grid of pending Buy Limit orders is placed on all lines of the fan. The stop-loss order is set at the level of 76.4%.
Using the first tactic brings a stable, but less profitable result, because it requires a steady trend. The second tactic is more aggressive, but brings higher profits.
It is worth noting that the Fibonacci Fan is very rarely used on its own. However, when additional tools are used, the Fibonacci Fan becomes an important element of any trending strategy.