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Sunday, January 17, 2010

Fibonacci Fans
Since I have been posting a Fibonacci fan (Fib fan) chart in my blog everyday, interest has really been picking up among people on what a Fib fan is, and how to use one, so I will try to lay out some of those answers and end with some of the charts I use everyday.

Fibonacci fans are very similar in concept to the Fibonacci retracements and in many ways they are used the same way. Both are effective tools for identifying support and resistance levels, determine the trend, areas to enter and exit, and to help provide levels to set stops.

Fibonacci fans, go one step further then Fibonacci retracements by adding time to the equation, so now we have price and time, mixed together. The Fibonacci fan uses the same primary ratios of 38.2%, 50% and 61.8% that form the "Golden Ratio."

Fibonacci Fans use these ratios based on time and price to provide support and resistance trendlines and are used to measure the speed of a trend's movement, higher or lower. In a bullish Fib fan, the higher fan that the price is in, the stronger the movements are, as the price starts to deteriorate and weaken, the price will challenge the first fan, where at first it provides support, once the price breaks through the first fan line it usually wont stop until it reaches the next fan line of support.

If the price moves below a Fib Fan trendline, then the price is usually expected to fall further until the next Fib Fan trendline is reached. When the final fan has been broke and the price is no longer with-in any parts of the fan, it signals that the trend has changed. Used along with Elliott wave counts, is a great tool for confirming a trend change has taken place. I would never use the Fib fan chart alone because of the possibilities of false signals, always use it together with other forms of Technical analysis to strengthen your existing tool belt.


Here is a chart of the SPX for the last three days where I applied the high and low extreme points after there was enough data to establish the trend. The diagonal fan lines are then based on an imaginary vertical line drawn from the top to the bottom price levels of the trend. The fan lines are drawn from the bottom of the trend through the vertical line at its 38.2, 50 and 61.8% points. And just as in Fibonacci retracement analysis, determining where the extreme points of the tops and bottoms of the trend are somewhat subjective, especially when the trend is in its earliest stages. However, Fib fans, like retracements, can tolerate a fair amount of variation as long as you are picking important highs and lows.
This is one chart that a few of you have seen before, the one I post everyday, and also the one I use most. It is a very good example of how the fans can be used to your advantage as another important trading tool.

The green fans, are the bullish fans, and the blue ones are the bearish fans. An important event occurred yesterday with respect to both of the bullish fans, the longest on going one starting back at the beginning of the month. A solid break happened, now the bullish fans have turned to resistance, and a new short-term trend has developed.

When new trends developed, the initial move can be extreme, as evidenced by the angle of the blue fan, making the first set of fans short-lived. Until enough price data becomes available to set a longer term trend, I treat these extreme movements with caution. This is a chart of the SPX that goes back three months with no short-term Fib fan support!!!
This chart shows the whole rally of the SPX from 666, with four sets of Fib fans. The first set, blue, was the first reliable set as the rally progressed, and if one were to have used this chart, you would of caught the sell-off from 956, and would of seen that the SPX recaptured the fan at 869, when it turned bullish again. The 2nd set, the green fans were established after 956 become the most important high, and now is the longest-term fan that the SPX is still respecting, with final support in the 1120-1125 area. The 3rd set, gray, is a shorter term fan that also is still being respected, with its final support in the 1110-1115 area. The final set of fans are the purple ones, and I just set them there speculating, what if a top was put in last week at 1150. If that was a top, the purple fans would be useful to set areas of support as a sell-off commences. If the SPX were to break through all of its fans, it would further signal that the rally from 666 was over.
This is a project being worked on with Anchak and myself about using a previous trend to help predict how a new trend could play out by using the strength of the older trend. Combined with the Fib fans we can lay-out some support/resistance levels for the new trend while still in its infancy. The blue dashed lines on the chart are just trend lines from the high/low extremes of the wave, then by calculating the angle of that trend we can measure its strength, then imposing the exact angle onto the new trend, we set the second point of the median line so we can draw a new set of Fib fans, even before any price data becomes available.

The above chart shows the back testing that I have done on the longer-term chart of the SPX, please note, all those Fib fans are set using only the previous waves trend strength, and could of been laid out well before the start of the waves they are laid over.

We believe the best use of this might be to bridge the gap between the start of a new trend, and the time that we could establish a reliable 2nd point to set a normal Fib fan!!!

7 comments:

  1. Hey Columbia! How do you determine an extreme point?

    ReplyDelete
  2. the first one is easy, either a top or bottom, the second one, is the hardest to get, but after awhile you get to the point of picking them easily. It is trial and error at first, but just keep at it, and you will figure them out. Basiclly, practice :)

    ReplyDelete
  3. Michael, how do you draw the lines with theFib percentages, how do you calculate it?

    ReplyDelete
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    ReplyDelete
  5. Hey,

    you are hiding your thought process on how to draw the fibo fan. I really would like to know how exactly you select the second point which is not the current extreme on the chart.

    ReplyDelete
  6. Nappy,

    The important point in selecting the first and second point is seeing if the drawn fibofan suits the price action or not.For example you draw a fibofan from the swing low to swing high, you will see if the price bounced off or reversed from the fibo lines or not.If they suit perfectly no problem, you found it.If not,you will move your swing low to the next close swing low, probably a few days ahead of the first point.Moreover you might need to move your second point to a few days ahead or before the second point.
    You might add fractals on your chart, switch to weekly monthly daily charts and try each low and high fractals as your points.Some pairs will fit the weekly fractals some daily some monthly.You might switch to 4h charts to see if the drawn fibofan fits it or not.
    Regards,

    Okan

    ReplyDelete
  7. Nappy,

    The important point in selecting the first and second point is seeing if the drawn fibofan suits the price action or not.For example you draw a fibofan from the swing low to swing high, you will see if the price bounced off or reversed from the fibo lines or not.If they suit perfectly no problem, you found it.If not,you will move your swing low to the next close swing low, probably a few days ahead of the first point.Moreover you might need to move your second point to a few days ahead or before the second point.
    You might add fractals on your chart, switch to weekly monthly daily charts and try each low and high fractals as your points.Some pairs will fit the weekly fractals some daily some monthly.You might switch to 4h charts to see if the drawn fibofan fits it or not.
    Regards,

    Okan

    ReplyDelete