The fan principle is based on the use of multiple trend lines to judge a major reversal in the market. The fan principle on first glance looks very busy on the chart, but it can provide some clarity to otherwise choppy patterns. The fan pattern or principle gets its name because it resembles a "fan". It should have a minimum of three trend lines, which contain the price movement. The origin of the trend lines should come from a significant peak or trough.
How to Construct the Fan Principle
Have you ever had a stock breakout of a trend line only to back test the line? Then after the second breakout, it back tests the second breakout line. This process will wear you out and window fan make it tough to stick to your trading guns. This is a simple of enough concept right? Well, what the fan principle provides you is a way to assess this struggle between supply and window fan demand and window fan to uncover the "true breakout", so you can go counter to the primary trend. The key to a good fan pattern is that the trend lines are clean and window fan truly contain the price pattern. Another thing to look for is that there is equal distance and window fan our slope of angle between each line.
How to Trade the Fan Principle
Since the fan principle is comprised of three trend lines, you will want to buy the break of the third trend line. By the time the third break occurs, the fan pattern has confirmed the breakout.
