the hAnDbook oF teChnICAl AnAlysIs
again, declining Fibonacci fan lines plotted from the base A to point C are valid
as long as price remains below point C. Therefore the fan line test at point D was
valid. Since price has now exceeded point C, any new areas of potential support
provided by declining fan lines must be determined by redrawing the fan lines
from the base A to point E instead. We cannot therefore continue to use fan lines
plotted from base A to point C for any future forecasts of potential support. The
fan lines have been invalidated.
The second scenario whereby fan lines should be redrawn occurs when
price has moved significantly away from the original base and peak in declin-
ing fan lines or base and trough in rising fan lines. The farther price is from
the fan lines, the less likely that it will test the trendlines again. Therefore, the
fan lines should be redrawn at a point closer to the current action, rendering
them relevant again.
One final issue about using fan lines is that there tend to be numerous fan line
violations and false triggers when price starts to consolidate instead of reversing.
It is best to avoid using the fan lines to initiate trades under such conditions. Note
also that Fibonacci fan lines, being dynamic overlay indicators, will yield different
results depending on whether a logarithmic‐ or arithmetic‐scaled chart is employed.
10.18 Fibonacci Channel Expansions
Fibonacci channel expansions help indicate potential areas of support and resis-
tance in price. The width of the channel is the basis for the expansions. Unlike
conventional Fibonacci expansions, Fibonacci channel expansions are normally
applied diagonally. As a consequence, Fibonacci channel expansions will yield dif-
ferent results depending on the type of scaling used on the charts.
Figure 10.68 Price Finding Support and Resistance on Declining Fibonacci Fan Lines
in Natural Gas.
Source: MetaTrader 4
