Understand & Use Fibonacci Ratio’s Understand & Use Fibonacci Ratio’s Part.4

Fib Fans
by Sunil Mangwani

• The Fibonacci fans are a charting technique consisting of diagonal lines that
use Fibonacci ratios to help identify key levels of support and resistance.
• Fibonacci fans are created by first drawing a trend line through two points
(usually the high and low), and then by dividing the vertical distance between
the two points by the key Fibonacci ratios.
• The result of these divisions each represents a point within the vertical
distance. The 'fan' lines are then created by drawing a line from the leftmost
point to each of the three representing a Fibonacci ratio.

Plotting Fib fans Plotting Fib fans
• Fib Fans give strong indications of direction. They act as effective
filters for a trend. It is considered, that these lines will serve as
levels of support/resistance for a developing pull-back or a new
trend.
• The fans that we use have 5 levels marked by fib levels – 38.2%;
50.0%; 61.8%; 76.4% & 88.6%. The fans thus create 4 channels
between the 5 fib fan levels.
• Once you have plotted fib fans, wait for price to enter the 1st
channel. A retracement gets confirmed only if price enters the first
fan channel. However, at each fan level, one must observe price
action to determine if a reversal will occur.
• For a valid entry into a fan level, one must have a candle close
within the fan channel. (Candle close of the same time frame that
one is referring to)
• A high probability of reversal is considered when we have a strong
candlestick pattern (like a doji) forming on a fib fan level

Fib fans – the 0.886 level Fib fans – the 0.886 level
• Of all the ratios, the 88.6 level holds a lot of importance. This is
the level, from where price has a very high probability of
retracement.
• We can thus call the 88.6 fan fib level as “The Barrier Level on
Fib Fans.” It is a level of high probability for trend change.
• Once price closes beyond 88.6, there is a high probability the
trend has reversed. Fib Levels are Pause Points for Price.
• If price breaks a fan level, it has a very high probability of going
to the next fan level. For example, if price has closed above the
76.4 fan line, the probability of it going to the 88.6 fan line is very
high. And if fan line holds, then we could have a reversal in
place.

Fib Fans Fib Fans
Ideal situation to use in –
• 1.) To determine the future levels of support/resistance (in case of an up
trend)
• Once the fans have been plotted from a swing low to a swing high in an
existing up trend, one should leave the lines since they subsequently
form the levels for resistance, which would indicate a change of trend to
the downside & confirm certain support levels.
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Fib Fans Fib Fans
Future levels of support / resistance

Fib Fans Fib Fans
Ideal situation to use in –
2.) For price in an existing trend – to determine the extent of a pullback/
retracement (in case of an up trend)
• We can use the fans to determine the extent of the pull-back, and
whether price should continue with the existing up trend or form a
reversal.
• In case of an up trend, we plot the Fib fans on the existing up trend
from the swing low to the swing high (from where price started the
pull-back down)
• If the pull-back is held within the Fib fans - and specifically as
mentioned before - if price does not break the 88.6 fan level or
finds support at that level, then the indication is that price should
resume the up move again.

Ideal situation to use in –
2.) For price in an existing trend – to determine the extent of a pullback/
retracement (in case of an up trend)
• As a thumb rule, the confirmation for the resumption of the trend
would be when price breaks into the 2nd channel (above 61.8 level)
• Hence the break of the 61.8 level should be considered to be the
entry, with the stop below the 88.6 level.
• The assumption is that if price has broken the 61.8 level, then it
has gathered sufficient momentum to resume the move in the
direction of the existing trend.
• Hence, the probability of price moving back down to the 88.6 level
is quite remote…….which becomes the correct technical level to
place the stop.


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Understand & Use Fibonacci Ratio’s Understand & Use Fibonacci Ratio’s Part.3

FibonacciExpansions
by Sunil Mangwani

Fib Expansions – Fib Expansions –
The Fibonacci expansion is a great tool for establishing profit targets.
• It offers a distinct advantage over the other usual fib ratios, since it isn’t as
widely used by traders.
• Rather than drawing levels “behind” the market, the fib expansions draw them
in “front” of the market.
• In other words, if the market is moving up and making new highs, the standard
fib retracements will draw levels BELOW the current price, but the fib
expansions will draw levels ABOVE the current price.

Plotting Fib Expansions Plotting Fib Expansions
• For plotting the Fibonacci Expansions you need 3 points, and the basic
technique for an uptrend, is to plot it off a Low, and High and a Higher Low (or
for down trends - a High, a Low and a Lower High).

Plotting Fib Expansions Plotting Fib Expansions
• We measure the distance from Point A to Point B. However, we can’t project
price targets until Point C has been established. Only when Point C has been
formed do we have the necessary three swing points.
• In short, we identify a trend that has started and pulled back, forming Points A
and B, and wait for Point C to form.
• Once Point C has formed, we plot the Fibonacci Expansion Tool on Point A,
Point B, and Point C.

Fib expansions – the 0.786 level Fib expansions – the 0.786 level
• The FE's that we use have 5 levels marked by fib levels – 50.0%;
78.6%; 100.0%; 127.2%; 161.8% & 261.8%.
• Of all the ratios, the 50.0 & the 78.6 levels hold a lot of
importance.
• A break of the FE 50 is an indication of the continuation of trend.
• And subsequently, the break of the FE 78 becomes the
confirmation of the change. The FE 78 is the level, from where
price has a very high probability of retracement. We can thus call
this as “The Barrier Level” as it is the level of high probability for
trend change.
• Once price closes beyond FE 78, there is a high probability of
the trend continuing. (The requirement is a close of a candle
outside this level, and not just a penetration of the level)

Fib expansions Fib expansions
Ideal situation to use in –
• It’s especially significant to draw the FE levels at turning points in the
market, which is when the market is putting in its first Higher Low or
first Lower High.
• Fib Expansions are useful in identifying potential price levels where you
might want to take partial positions off the table to lock in some trading
profits. They can be used very effectively to calculate the reward to
expect, for the risk you are taking.
• Once you have plotted fib expansions, wait for price to break the FE 50.
The continuation is confirmed only if price breaks the FE 78. However,
at each FE level, one must observe price action to determine if price will
continue further.
• If price breaks a FE level, it has a very high probability of going to the
next FE level. For example, if price has closed above the FE 78, the
probability of it going to the FE 127 is very high.
• For a valid entry into a FE level, one must have a candle close within the
FE level. (Candle close of the same time frame that one is referring to)

Use of the Fib expansions.1 Use of the Fib expansions.1
• 1.) To determine the future levels of resistance (in case of an uptrend)
• We can plot the FE levels within any price wave which gives us the 3 points as
required – a swing low, a swing high into the uptrend, and then a pullback
giving a lower high.
• (An important point to note is that, the third point should be a higher low. In
case this pullback goes below the previous swing low, the situation does not
warrant the use of a Fib expansion.)
• In such cases, as mentioned earlier, a safe entry into the long trade would be
the break of the FE 78 level, with the stop beneath the third point (the higher
low), and targeting the future fib levels.
• Hence we can calculate the Risk-to-Reward ratio, and also decide where to take
partial profits, and where to exit the trade.

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Understand & Use Fibonacci Ratio’s Part.2

Retracements & Projections Retracements & Projections
by Sunil Mangwani

• The basic use of Fibonacci retracements is to find potential levels of support or
resistance “behind” the market. If the market is moving up and making new
highs, Fib retraces will draw levels BELOW the current price.
Ideal situation to use in –
• To estimate the horizontal levels of support/resistance for a pullback in an
existing trend.

Plotting Fib retracements
• The Fibonacci retracements are calculated by taking two extreme points
(usually a swing high and swing low) on the price movement and dividing the
vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and
100%.
• Once these levels are identified, horizontal lines are drawn and used to identify
possible support and resistance levels.
• The direction of the prior trend is likely to continue once the price has retraced
to any of the ratios.

Fib retracements – the 0.786 level Fib retracements – the 0.786 level
• Of all the ratios, the 0.786 level holds a lot of importance.
• This number is the square root of the “golden number” 0.618, and hence acts
as a very strong level of resistance / support.
• When we are looking at a change of trend, it is best to wait for price to break the
fib retracement of 0.786.
• This is the level, from where price has a very high probability of retracement.
• The 0.786 is thus known as the “reversal” fib level.

Use of the Fib retracements for Entry & Stop
• For price in an existing trend - when we are looking for a pullback to rejoin
the existing trend.
• In case of an uptrend, we plot the Fib retracement ratios on the previous
existing up trend.
• If the pullback is held within the Fib retracements, and if price does not break
the 0.786 level, then the indication is that price should resume the up move
again.
• So the break of the 23.6 level should be considered to be the entry, with the
stop below the 61.8 level.
• The assumption is that if price has broken the 23.6 level, then it has gathered
sufficient momentum to resume the move in the direction of the existing trend.
• Hence, the probability of price moving back down to the 61.8 level is quite
remote…….which becomes the correct technical level to place the stop.

Fib projections –
• The Fibonacci projections are used to determine the expected price targets,
once it has crossed the Fibonacci retracement levels.
• If we are anticipating price to begin an uptrend, we can use the last prominent
down wave to determine the expected upside targets.
• Thus we are projecting the price action forward, using the last prominent
moves.
Ideal situation to use in –
• For estimating the price targets after the pullback is completed. We project the
price action forward, estimating that it will reach the fib levels.

Plotting Fib projections – Plotting Fib projections –
• The Fibonacci projection is calculated by taking two extreme points (usually a
swing high and swing low) on the price movement and adding the key
Fibonacci ratios of 1.272%, 1.618%, 2.000% & 261.8%.
• Once price has crossed the levels of the swing high or swing low, the above
mentioned projection levels identify possible support and resistance levels.
• Of all the ratios, the 1.272% & 1.618% levels hold a lot of importance, since they
usually act as very strong levels of resistance / support.

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Understand and Use Fibonacci Ratio`s

Understand and Use Fibonacci Ratio`s (part 1)
Basic Ratio by Sunil Mangwani

Fibonacci ratios
• Fibonacci ratios are a very popular tool among technical traders and are based
on a particular series of numbers identified by mathematician Leonardo
Fibonacci in the thirteenth century.
• The Fibonacci sequence of numbers is as follows:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc.
• Each term in this sequence is simply the sum of the two preceding terms and
sequence continues infinitely.
• One of the remarkable characteristics of this numerical sequence is that each
number is approximately 1.618 times greater than the preceding number.
• This common relationship between every number in the series is the foundation
of the common ratios used in retracement studies.

The Golden ratio The Golden ratio
• The key Fibonacci ratio of 61.8% - also referred to as "the golden ratio" or "the
golden mean" - is found by dividing one number in the series by the number
that follows it. For example: 8/13 = 0.6153, and 55/89 = 0.6179.
• The 38.2% ratio is found by dividing one number in the series by the number
that is found two places to the right. For example: 55/144 = 0.3819.
• The 23.6% ratio is found by dividing one number in the series by the number
that is three places to the right. For example: 8/34 = 0.2352.

Fibonacci ratios in the markets Fibonacci ratios in the markets
• For some reason, these ratios seem to play an important role in the financial
markets, just as they do in nature, and can be used to determine critical points
that cause price to reverse.
• Price has an uncanny way of respecting Fibonacci ratio’s, often quite precisely.
Hence one can use the Fib ratios to ascertain the correct technical levels.
• Frankly there is nothing magical about these numbers, and price reacts at these
levels simply because a majority of traders are following the ratios.

The proper use The proper use
• Another common miss-interpretation of the Fibonacci numbers is that traders
tend to use the same Fibonacci ratio for all kinds of situations.
• Just like the different tools in a carpenter’s tool box, each ratio should be used
in a particular situation.
• While you obviously cannot use a hammer for a job that requires a screw driver,
similarly you cannot use Fibonacci retracements in a situation where the
Fibonacci fans are required.
• Let us have a detailed look at the different Fibonacci ratios and their uses for
the correct situations.
• Using these ratios in a proper way gives us a tremendous advantage over the
crowd.

Fib retracements and projections –
Fib retracements – Fib retracements –
• The basic use of Fibonacci retracements is to find potential levels of support or
resistance “behind” the market. If the market is moving up and making new
highs, Fib retraces will draw levels BELOW the current price.
Ideal situation to use in –
• To estimate the horizontal levels of support/resistance for a pullback in an
existing trend.

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