The Hindu Business Line : Trader's Corner

We continue to mull over the ways in which the Fibonacci series and ratios are useful in real-time trading this week too. The regularity with which these ratios keep popping up while using technical analysis is astounding.

We discussed the Fibonacci retracements last week. There are two more (less popular) tools with which the supports and resistances can be gleaned with the aid of these ratios. They are the Fibonacci fan and the Fibonacci arc. Though these are not as effective as the retracements, knowledge of these tools will come in handy to fortify your analysis.

The Fibonacci fan is a three-line tool that uses the ratios .382, .50 and .618. To draw the Fibonacci fan a trend line is drawn from the nearest peak to trough or vice versa. Next, the vertical distance between a peak and trough is divided by the ratios 38.2, 50 and 61.8. Then three lines are drawn from the leftmost point in the trend line to intercept the vertical line at the three levels derived by the ratios.

A more picturesque way of utilising the ratios to derive supports and resistances is by drawing the Fibonacci arcs. The initial steps for drawing the arc are similar to that for drawing the Fibonacci fan. The ratios are divided from the vertical distance between a peak and a trough. Then arcs are drawn through these levels of 38.2, 50 and 61.8 per cent.

As the security moves up after a down-move, the Fibonacci fan lines and arcs provide the levels where the price would encounter resistance. Similarly, in a correction, these lines and arcs provide the support levels. The Fibonacci fans and arcs can be used in conjunction with other tools. The convergence of many tools at a specific support or resistance would make that level an important reversal point.

The major drawback with these tools is that they tend to lose their relevance in a prolonged sideways move. Secondly, since they are less used, they do not enjoy the psychological advantage that the Fibonacci retracement does.

Lokeshwarri S.K.

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