Fibonacci Arcs and Fans: An in-depth analysis
As part of trading strategies evolving from the Fibonacci sequence, Fibonacci arcs and fans are valuable Forex indicators. Read more from Queensway.
What Are Fibonacci Fans & Arcs Used For?
The Fibonacci theory of numbers has produced five major Forex trading strategies. Two of the most useful ones are Fibonacci arcs and fans. While arcs and fans are related to each other, they both offer distinct advantages as a Forex indicator for traders seeking to monetize price reversals.
Arcs function much like a basic retracement strategy with lower and upper ranges that are established by a trader. They enable a trader to capitalize on a reversal in the price direction for that foreign currency unit.
Three semicircles are drawn with the top point as the centre. Each semi-circle crosses a diagonal line connecting the top point and bottom point to the 38.2%, 50%, and 61.8% levels – levels that are derived from the Fibonacci Theory. From this, the lines of resistance or support are created and show reversal trading positions.
Investors and traders will use a Fibonacci arc in order to generate support and resistance levels that are dynamic. This means that the arc changes over a time period and is depicted by rises and falls.
The half-circle indicates the width of the arc and its true function is to indicate the distance and time that a baseline will cover. The arc uses a baseline that is drawn between two important or significant high and low points.
Keep in mind that you can use this between the two closing points or prices. This is done in order to determine areas that might be of importance in the future.
The arc is based on the Fibonacci sequence of numbers that can be seen throughout almost every facet of our lives. It can be noticed in the way trees grow and how flowers bloom and even to determine how much a population may spread.
The golden ratio has been used in architecture and the arts, and only recently have investors and traders realised that it may be a good tool to use in the economic market in order to more accurately predict trends in certain markets.
It is essential that traders remember to use multiple different methods in conjunction with the Fibonacci arc in order to provide a more accurate chart to relate to.
Fibonacci fans are much like arcs, in that the strategy is like a basic retracement trade seeking to profit from prices reversing in direction.
For a fan, the top and bottom ranges are created. Within any given time segment, diagonal lines are drawn from the lowest to the highest point. With this vertical distance known, 38.2%, 50%, and 61.8% are then chartered to establish the resistance and support levels.
The fan is essentially a charting technique that is utilised by many seasoned traders or investors when trying to make an accurate prediction as to which path or direction a particular market is going to move.
As the arc and fan are closely related to a common intellectual foundation, both present similar issues for Forex traders.
The fan method also employs the use of the Fibonacci sequence or numbers. Both attempt to capitalize on what is calculated to be a trend reversal. Should there be a full metal jacket bull or bear market developing for that foreign currency unit, the trading positions will be defeated.
This could also happen if Fibonacci arcs and fans are utilised for brief time periods. If the traditional trading pattern does not endure upon the Forex chart, then the position will be badly damaged, resulting in heavy losses.
What makes relying on the Fibonacci theory even more dangerous, is that future positions could be established based on the series of numbers ahead resulting in a reversal. But if that does not happen due to a new Forex pattern being established for that unit, traders will suffer great losses.
The Fibonacci fan trading sequence is well known throughout the world, so let us take a closer look to reveal how simple it is to use.
It begins with the number 0 then 1, 1, 2, 3, 5, 8, 13, 21, etc. Basically, each digit is the sum of the previous two numbers combined and in theory, can follow this sequence into infinity.
Using these Strategies
Stock prices have been observed to exhibit patterns that can be identified with relative ease when using either the fan or arc in chart form. According to Katherine Burton in her book, “Hedge Hunters,” about the top asset managers in the world, even the best are only right about 55-60% of the time.
What allows these hedge fund managers to trade foreign currency and other assets and make billions is the ability to quickly close losing positions and let the profitable ones ride. The most profitable foreign exchange investors have been those gaining from the trends in the market.
Both the Fibonacci arc and fan can easily result in misreading a new market trend. This would destroy the positions of those utilising these strategies. Conversely, for positions that are structured to benefit from new market trends that move in the trade’s direction, the gains from how to use Fibonacci fan and arc patterns could be quite significant.