Elliott and Fibonacci waves are a perfect crossover to measure price movements in terms of amplitude and end time. Fibonacci ratio levels are the basis of the Elliott wave as stated by Mr. RN Elliott – the father of this theory. So what is the relationship between Elliott wave and Fibonacci wave, let's find out in today's article.
Learn about Elliott and Fibonacci wave theory
1. Elliott Wave Theory
The Elliott Wave Principle is a technical way of analyzing stock market cycles reputable forex broker and analyze key market trends, identifying extremes in trader psychology, price highs and lows, and collective factors.
View more: Know what is forex? Basic knowledge of forex trading
This theory indicates that the market moves in a 5-3 wave pattern:
- The first 5 wave pattern is called an impulsive wave and it moves in the same direction as the trend of the higher level wave.
- The last 3-wave pattern is called a correction and it moves in the opposite direction of the higher-level wave trend.
The three rules of Elliott waves:
- Wave 2 does not recede beyond the beginning of wave 1.
- Wave 3 is not the shortest of impulse waves 1, 3, 5.
- Wave 4 did not breach the wave 1 price zone.
However, it should be noted that these patterns only help to determine market odds, but do not necessarily provide information about future price movements.
See also: Find out what is Elliott wave? Learn about the 5 levels of the Elliott wave
2. Fibonacci numbers and Fibonacci proportions
This is an infinite sequence of numbers, starting with 0 and 1, the next numbers are calculated by adding the previous 2 numbers. We have the following Fibonacci sequence: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610,…
The Fibonacci sequence has interesting features:
- Except for the first 4 numbers, the ratio of any number 1 to the next best number is always approximately 0.618.
- The ratio of any two numbers to the smaller number is 1.618 or its reciprocal is 0.1618.
- The ratio of alternating numbers is also always approximately 2.618 or the reciprocal of 0.382.
From Fibonacci series ratios such as: 1.1618, 2.618, 0.382, … are used to become Fibonacci retracement or extended Fibonacci levels to take profits or exit orders effectively.
See also: What is the Fibonacci indicator? Guide to Effective Fibonacci Trading
The relationship between reason Elliott and Fibonacci waves
The perfect combination of Elliott and Fibonacci waves is used to establish support and resistance levels for market waves, namely based on price levels that can determine the parameters of a trend. The Elliott Wave Principle creates the form and structure, while Fibonacci indices provide a measure of price movements in terms of both range and termination. So what will the Elliott wave match with Fibonacci?
This first wave is the beginning of a series of main waves, the starting point of which is a bear market, so it is rare to recognize wave 1 the first time around. The direction of the market before wave 1 occurred was mainly a market downturn. However, on wave 1 we will not trade but wait until the formation is complete to calculate the next wave amplitudes.
Major wave 2 will correct wave 1, but the retracement never goes beyond the first point of wave 1. Trading volume on wave 2 will be less than wave 1.
Here, the price will have a downward correction and stay in the range of 0.382 to 0.618 of the peak of wave 1. Compared to wave 1, wave 2 will mainly retrace 3 levels of 50%, 61.8% and 76.4%, redo . at least 23.6%.
View more: Find out what the host wave pattern is? Variants of this pattern in Forex trading
Typically, wave 3 is the best and most powerful wave in an uptrend. Lead wave 3 is at least the same as wave 1, except for the Main Diagonal (LD), End Diagonal (ED) patterns, wave 3 will be shorter than wave 1. If wave 3 is the longest and most extended of host waves 1, 3, 5, it tends to be higher than the peak of wave 1 by a ratio of 161.8% to 261.8% or even 461.8%.
Wave 4 is a corrective wave, in this wave the price tends to fall and can create a long sawtooth pattern. Wave 4 will generally correct to 38.2%, 50%, 61.8% from wave 3 if wave 3 is not an extension.
If wave 3 expands, wave 4 retraces only 23.6% or 38.2% compared to wave 3. On wave 4, trading volume is usually less than the volume on wave 3.
This is the last wave of the 5 main waves. Wave 5 is usually equal to wave 1 or a distance of 61.8% from the length of wave 1. Wave 5 can be 38.2% or 61.8% from the bottom of wave 1 to the top of wave 3 combined.
If wave 5 is an extension then it will be 161.8% of wave 3 or the sum of wavelength 1 and 3 with a ratio of 161.8%. If not an extension, a divergence between the top/bottom of waves 3 and 5 will appear.
Wave A will be the start of corrective waves A, B, C. Wave A usually retraces 38.2% from all 5 previous waves and enters the 4th wave zone.
Wave B has almost recovered from 38.2% or 61.8% of wave A. Here, the trading volume of wave B is generally lower than wave A.
The C wave is usually as big as the A wave or also usually widens to a length of at least 61.8% of the A wave. The C wave can be short and cannot break the end of the A wave in a zigzag run ( ZZ) or standard flat (FL).
Conclusion
Above is the correlation between Elliott and Fibonacci waves, we can rely on this combination to find the entry and exit levels of a trend. However, there are actually waves that can be noisy compared to Elliott waves, so you need to be alert, practice more, or learn more Forex signals to bring a better probability of winning. I hope the information about Elliott wave combined with Fibonacci in the article will be useful to you. Also, you can learn more about Ichimoku in our next article.
View more: What is Ichimoku? Instructions for Using Ichimoku Clouds Effectively on Forex