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In the foreign exchange market, technical analysts are quite familiar with the chart pattern that follows 3 trend lines to form a typical paper fan: the fan principle. According to experienced traders, it’s the indicator that makes it easy to spot a trend reversal; whether the said reversal is an uptrend or a downtrend, you can chase after the more rewarding market direction. If you want to profit well with the tool, it’s a plus to find out more details about it.
The fan principle describes the use of a technical analysis chart to identify 3 trend lines; the said lines should come from a significant point. Apart from spotting major reversals in market direction, it can draw out market noise; misleading patterns will be omitted from the analysis so you can focus on clear signals. The trend lines go up, then, slide down, and finally head back up again; from an informal view, you’d consider its formation to resemble a paper fan.
The secret of the fan principle is in the establishment of clear trend lines; it follows that with a disorganized pattern, the possibility of making inaccurate predictions exists. First, you need to have a stock breakout, then, have it back-tested; do the process all over again. The procedure can be exhausting, but the goal is to be familiar with the levels of supply & demand that are involved, as well as to identify “real” breakouts. Besides, once you get the hang of the series, you have the advantage of making better predictions.
This Is How You Do It
As discussed, the fan principle is centered on 3 trend lines. If you’re planning to enter the forex market, you need to look at a chart first, then, establish a pattern that forms 3 lines in a zigzag approach. The cue to make your entrance is during the breakout of the 3rd trend line; by this time, you received confirmation of the fan chart pattern.
So, Will Trading with the Fan Principle Be the Right Call?
Yes, trading with the fan principle will be the right call, especially if you prefer to make predictions based on solid information. Granted you’re patient and you refuse to rely on chart patterns that may lead to false indications of a trend reversal, it seems it’s an excellent technical indicator for you.
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