Type of Indicators in Technical Analysis – The Fibonacci Fan
The Fibonacci fan is a charting technique that constructs the support and resistance levels by creating three diagonal lines that follow the Fibonacci ratios of 38.2%, 50% and 61.8% respectively. The diagonal lines drawn across the chart shown below are based on the Fibonacci ratio percentages.
The sketch above shows how the Fibonacci fan should be plotted according to the Fibonacci ratio percentages. The top portion of it being at 38.2%, the middle section 50% and the lower section at 61.8%.
To plot the Fibonacci fan, you will find the highest point or lowest point of the graph and start from there to set the anchors.
In the illustration above you can see that the lowest and highest points are used as anchors and then the lines according to the Fibonacci ratio percentages are drawn from there.
The highest and lowest points may be subjective because the price trend may completely move away from the Fibonacci fan, thus a secondary highest and lowest points may be used to better suit the placement of the Fibonacci fan.
Once the lines are plotted, it then creates the support and resistance levels.
Just like identifying normal support and resistance levels, the lines are to gauge where the prices may reverse as well as to forecast the limits of trend.
In the illustration above referring to point A, the lines act as support and resistance lines indicating price reversal when the prices touch the support and resistance levels. From point B onwards there is a breakout, and hence, the trend will continue to go up until if finds a new resistance level.
Like all other indicators, the Fibonacci fan is not meant to be a standalone system. As no indicator is perfect, it is best to use a pool of indicators that best suit your trading style.
Other Indicators in Technical Analysis:
- Average True Range (ATR)
- Bollinger Bands
- William %R
- Moving Average Convergence Divergence (MACD)
- Relative Strength Index (RSI)
- Commodity Channel Index (CCI)
- Moving Averages
- Retracements and Trend Reversal
- Support and Resistance
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