This chapter is somewhat different since Fibonacci studies—in this instance, the study of Fibonacci fans—are more about finding important support and resistance levels than about finding a projected target price. Fans are also somewhat challenging since it requires a good eye to find appropriate charts for their application. This skill comes with experience, but hopefully the many examples provided in this chapter will provide some training.
DEFINITION OF THE PATTERN
Setting down Fibonacci fans on a chart is the easy part: All you need to do is choose a high and a low point for the reference line. The charting program you use will draw the fan lines for you, and it is up to you to decide if those lines are useful to you in your trading or not. I sometimes use the term Fibonacci-friendly to state whether or not a given price chart happens to agree with a particular Fibonacci-drawn object.
The way the charting program draws these lines is useful to understand. Imagine a reference line being drawn on a chart with the low price at $10 and the high price at $20. Think of this as one line of a triangle. Now imagine a horizontal line projecting from the point at $10 off to the right; this is the second line of the triangle. Finally, imagine a vertical line being drawn straight down from the $20 point of the first line; this is the third line of the triangle.
The charting program draws lines, in this instance, from the $10 point to various points on that third ...