Fibonacci Fan Tool

In comparison to other Fibonacci charting tools, the Fibonacci Fan Tool is one of the easier Fibonacci charting tools to use and place on a stock chart. While I use the other Fibonacci charting tools (Fibonacci Extension and Retracement Tools) for multi-purposes, I typically use the Fibonacci Fan Tool for one purpose only:

The Fibonacci Fan Tool assists me with purchasing shares by providing zones or “quadrants” that can be used as part of a scale-in share purchase strategy.

And while the Fibonacci Fan Tool can help you scale into a position on a hot, upwards trending stock chart, I prefer to use them on longer-term charts.

When a Fibonacci Fan Tool is used on a longer-term chart, like a weekly or monthly candlestick chart, it provides investors with value opportunities by identifying value buying zones (quadrants).

Components

Learning the components of the Fibonacci Fan Tool will help with determining the appropriate scale-in strategy based on your type of overall investing strategy. So let’s start with the various components of a Fibonacci Fan Tool:

2 Anchor Points – Anchor Points are used to place the Fibonacci Fan Tool on a stock chart.
3 Trendlines – All of the Trendlines are automatically calculated and drawn after the 2 Anchor Points have been placed on the stock chart. The automatically calculated and drawn Trendlines result in the development of 2 Quadrants:
- An Upper Quadrant
- A Lower Quadrant

The 3 Trendlines, the Upper Quadrant and the Lower Quadrant (as well as breaks below the Lower Quadrant) can all be used at different times during a stock’s uptrend as places to purchase shares.

The Components of a Fibonacci Fan Tool

Just like all other Fibonacci Charting Tools, the Fibonacci Fan Tool can be used on candlestick charts covering different lengths of time such as 5 minute charts, hourly charts, daily charts, weekly and even monthly charts.

When share prices are trending upwards and[s2If !current_user_can(access_s2member_level1)]…….If you want to continue learning about things like:

the components of a Fibonacci Fan Tool
how to use the tool to monitor pullbacks and calculate purchase areas
advanced techniques, like how to trade using a Fibonacci Fan Tool
tips and warnings when using this tool

You must first sign in. If you are not a Trendy Stock Charts member, consider one of the subscription plans.[/s2If][s2If current_user_can(access_s2member_level1)] there is heavier than normal buying support, the share price tends to find support on the top Trendline and in the Upper Quadrant during subsequent pullbacks. However I tend to be a little more conservative with my trading and prefer to purchase shares in the Lower Quadrant or even on a quick break below the Lower Quadrant.

Chart Placement

Pull up a candlestick chart for the stock you are looking to purchase shares in and find an uptrend on its chart. Select the Fibonacci Fan Tool from your trading platform’s list of charting tools.

Start by placing Anchor Point #1 at the very beginning of the uptrend on the chart you are analyzing. Placing the Anchor Point is performed by left clicking your mouse. Anchor Point #1 should match the candlestick’s intra-period low.
Place Anchor Point #2 at the end of the uptrend. The end of the uptrend can be identified by the first “significant” pullback. Place Anchor Point #2 at the end of the uptrend before the pullback begins. Anchor Point #2 should match the candlestick pattern’s intra-period high.

Standard Anchor Placement for a Fibonacci Fan Tool

After both Anchor Points have been placed, the 3 Trendlines are then automatically projected on the stock chart creating the Upper and Lower Quadrants.

As a stock’s share price enters the Upper and Lower Quadrants, its candlestick patterns should be watched for additional trend reversal indications. A bullish reversal candlestick that develops on a Fibonacci Fan Tool’s Lower Trendline on buying volume that is heavier than normal will give me greater confidence in placing and executing a trade to go long and purchase shares of that particular stock. Also refer to The Confidence Trade Set-Up that I discuss under the Tips & Warnings section below.

Just like every other Fibonacci charting tool, Fibonacci Fan Tools can be used on all candlestick charts of varying lengths (5 minute charts, hourly charts, daily charts, weekly charts and even monthly charts).

Tips & Warnings

Wave 1 Placement

Assuming you have a basic understanding of Elliott Wave Patterns, place Anchor Point #1 at the beginning of a potential Wave 1 in a Motive Wave Pattern.

Place Anchor Point #2 at the end of Wave 1 (which is also the beginning of Wave 2).

The Motive Wave Pattern illustrated here is an Impulse Wave Pattern, the most common type of Motive Wave Pattern.

Use At Least 3 Fibonacci Fan Tools

Look to place at least 3 Fibonacci Fan Tools on each stock chart.

The first Fibonacci Fan Tool should cover a recent, short-term uptrend (1-3 months)
The second Fibonacci Fan Tool should be placed on a medium-term uptrend (3-9 months)
The third Fibonacci Fan Tool should be placed on a long-term uptrend (> 1 year)

Using multiple Fibonacci Fan Tools can create Trading Channels as a stock’s share price continues its upwards advance. These Trading Channels can be used as short-term guides for the stock’s share price. Another tendency you may notice is that most times it takes an above average volume spike to move out of one Trading Channel and into another.

When placing multiple charting Fibonacci Fan Tools on a stock chart, I recommend using different colors in order to distinguish between the different Trendlines produced from all the Fibonacci Fan Tools.

Using different colors becomes even more important when mixing and combining several different types of Fibonacci Charting Tools, like a Fibonacci Fan Tool and a Fibonacci Retracement Tool. Different colors make it easier to analyze the different Retracement Lines, Target Lines and Trendlines from all the various Charting Tools.

Breaks Below The Lower Quadrant

I have observed numerous times where breaks below the Fibonacci Fan Tool’s Lower Quadrant represented the best opportunity to purchase shares using a scale-in purchase strategy. Keeping this in mind, I try to purchase my largest percentage of shares when the stock’s share price breaks below the Lower Quadrant of the Fibonacci Fan Tool.

Breaks below the Lower Quadrant usually provide value investors with an opportunity to go long on a stock. But when a stock’s share price is breaking below the Lower Quadrant of a Fibonacci Fan Tool, it is most likely due to some form of negative news, whether its a string of bad earnings reports or some form of bad publicity, it is usually difficult to purchase shares of the stock at the time.

Regardless, after breaking below the Lower Quadrant, another Charting Tool needs to be used to try to determine the next level of support for the share price. Maybe it is a bullish reversal candlestick pattern. Maybe its a Confidence Trade Set-Up that develops on the stock chart. But since breaks below the Lower Quadrant can sometimes be quick in duration, it is necessary to perform the necessary analysis as soon as possible after a Lower Quadrant break happens.

The Confidence Trade Set-Up

I define a Confidence Trade Set-Up when there are 3 or more technical analysis methods that all point towards the same price objective. Any combination of 3 technical analysis methods will work, such as Candlestick Analysis, Fibonacci Analysis and P&F Charting. But here are a couple of specific combinations of Charting Tools that give me the greatest confidence to go long and execute a share purchase when they are all confirming a trend reversal in the same area:

A Fibonacci Fan Tool, a Fibonacci Retracement Tool and a Bullish Reversal Candlestick Pattern.
A Fibonacci Fan Tool, a 20 Day or 50 Day Moving Average and a Bullish Reversal Candlestick Pattern.
A Fibonacci Retracement Tool, a Main Supporting Long-Term Trendline and a Bullish Reversal Candlestick Pattern.
A Fibonacci Retracement Tool, a 20 Day or 50 Day Moving Average and a Bullish Reversal Candlestick Pattern.

Adding a 4th or 5th technical analysis method of confirmation starts to really get me excited….and when the potential trade has a Risk to Reward Ratio that is 1:3 or better along with a 5 method Confidence Trade Set-Up, holy cow! Those sort of set-ups usually encourage me to risk larger percentages of my total portfolio on the trade!

Practice, Practice, Practice

Yes, you will hear me say that practice makes perfect more than once on this site, so practice, practice, practice! One of the best methods that I used to when learning how to use the various Trading Tools was to practice with old chart history.

Placing the Fibonacci Fan Tool on dozens and dozens of older charts and then seeing how a stock’s share price interacted with the Tool’s Trendlines and Quadrants has provided me with tremendous insight, I’m sure it can help you with learning how to use and analyze the Tool as well.

Real Chart Examples

So now that you have an understanding of the components of the Fibonacci Fan Tool, let’s use the Tool on an actual chart. I selected a fan favorite stock for this purpose – Apple. This next chart for Apple the same chart I used above to illustrate the placement of the Fibonacci Fan’s 2 Anchor Points.

Here are the steps I followed when placing the Anchor Points for the Fibonacci Fan Tool on Apple’s 3 year weekly candlestick chart.

The beginning of Apple’s uptrend is $55.01, so that is where I placed Anchor Point #1.
For Apple, I wanted to look more at a medium to longer-term opportunity, so I placed Anchor Point #2 at the end of a medium-term uptrend. Apple’s share price hit an intra-day high of $82.16 at the end of the uptrend, so that is where Anchor Point #2 is placed.

Using a Fibonacci Fan Tool on a 5 Year Weekly Candlestick Chart for Apple (AAPL) to Identify Value-Oriented Purchase Areas

I typically like to purchase shares to go long when the share price breaks into the Lower Quadrant or even on a break below the Lower Quadrant. Apple’s share price only made it into the Lower Quadrant for a couple of days and never did break below the Lower Quadrant.

Apple’s chart is a perfect example showing how shares purchased on a break below the Lower Quadrant of a Fibonacci Fan Tool can be lucrative with just a little patience. It represented a value-oriented purchase at the possible beginning of a new uptrend for its share price. Using a scale-in purchase strategy is be when purchasing shares on breaks below the Lower Quadrant.

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