Wave Elliott Analysis with Fibonacci Tools | Apexum

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Wave Elliott Analysis with Fibonacci Tools

June 17, 2019

The Elliott Waves Theory survived the test of time to become of the most widely used trading theory in the market. Ralph Elliott built a logical process that splits the market moves into impulsive and corrective ones, using numbers to depict impulsive levels and letters for corrective levels.

Based on many rules, the Elliott Waves Theory is a trading strategy that allows forecasting the future market activity. Out of the Fibonacci tools, three of them are of great use in the Elliott Theory:

  1. Fibonacci Retracement
  2. the Fibonacci Retracement tool is key to analyzing the market. The Elliott Wave method is based on interpreting retracement levels so to distinguish between market moves. Here are some examples of where to use the Fibonacci Retracement tool with the Elliott Wave method, to build a Forex trading system:
    1. a flat pattern (a-b-c) has the b-wave’s retracement minimum 61.8% of the a-wave’s length
    1. a zigzag typically has the b-wave retracing 38.2% of the a-wave’s length
    1. the 2nd wave in an impulsive move typically retraces between 50%-61.8% of the previous first wave
    1. the 4th wave in an impulsive move retraces most of the times between 23.6% and 38.2% of the previous 3rd wave
  3. Fibonacci Expansion
    1. The Fibonacci Expansion is a great tool to project future levels and measure the length of market waves. Here are some situations where the Fibonacci method of trading is useful in the Elliott Waves Theory:
      1.  The 161.8% level is used to calculate the minimum distance the market travels in the extended wave
      1.  In a triangle, the 261.8% level is the one that tells if the market forms an irregular triangle or not. More precisely, the b-wave in an irregular triangle cannot be longer than 261.8% of the previous wave a. If that’s the case, the b-wave is either incomplete, or the pattern is just not an irregular triangle.
      1.  In a robust impulsive wave, the market can easily travel beyond the 461.8% extension level during the extended wave
      1.  If the b-wave of a flat retraces more than 161.8% of the previous a-wave, the c-wave won’t completely retrace the b-wave
  4. Fibonacci Time Zones
    1. The Fibonacci Time Zones tool is one of the less used Fibonacci tools. However, it has many applications with the Elliott Waves Theory especially when determining the formation of a limiting triangle
      1.  A limiting triangle is a special Elliott pattern. It forms either as the b-wave of a zigzag or the 4th wave of an impulsive wave.
      1.  The price action that follows a limiting triangle is “limited”, meaning that the market can’t travel much more after the triangle breaks.
      1.  The key to a limiting triangle is its apex (the point on the right side of the chart when the two trendlines intersect)
      1.  Using the Fibonacci Time Zones, traders measure the distance from the start of the triangle until the apex (the time distance) and compare it with the breakout moment. A 20%-40% breakout validates the triangle.

Conclusion

We can say without a shadow of a doubt that the Elliott Waves Theory would not be possible without the Fibonacci ratios. Therefore, the Fibonacci tools are mandatory to correctly label impulsive and corrective waves with the theory.

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