One of the requirements to grow into a sophisticated Elliott wave trader is to combine Fibonacci and Elliott wave analysis. My objective with this article is to highlight the best ways to combine Elliott wave trading and Fibonacci more effectively.
Today's topic is more suitable to those who are using the wave principle, and want to boost it with Fibonacci retracement, extensions and patterns. Let's get right into it.
Use Of 138.2% Fibonacci Extensions For Elliott Wave Analysis
The most widely used Fibonacci key level in Elliott wave analysis is the 138.2% Fib extensions. So you count first and second waves, and the third Elliott wave is underway, next, draw that 138.2% Fib extensions of the first wave.
Quite often, financial instruments with a degrading financials fail to cross that Fibonacci extensions level. A reversal can occur at that level. Watch that level because a nice third wave can fail right there. Watch it also for a retest after a breakout to add to your third wave entries.
Another 138.2% Fibonacci level one must watch is the 138.2% Fib extensions of the fifth wave. A fifth wave is in place, and price starts to pull back ( common sense trend line of 5th wave is broken), now draw that 138.2% Fib key level. It helps to spot the peak of the B minor wave of an expanded flat corrective wave.
Elliott traders also use the 138.2% Fibonacci extensions of the third Elliott wave as a possible price target level for the fifth wave as soon as the fifth is underway. I said possible target, not a definite or only target please.
Using 161.8% Fibonacci Extensions As An Elliott Wave Trader
The number one role of the 161.8% Fib extensions is to validate a third wave.
According to the Elliott wave rules, a normal ( non extended) third wave should reach that 161.8% extensions level of the 1st wave otherwise it is an invalid 3rd wave. By validating the 3rd wave, the 161.8% Fibonacci extensions of the 1st wave becomes a key validator of the motive wave (trending phase).
A common Elliott wave analysis error is to take an X-WAVE as a motive wave (real trend). Be aware of the WXY wave structure. Furthermore, the 161.8% Fibonacci extensions of the first wave helps to identify an extended third wave because an extended third wave must significantly break above or extend beyond that 161.8% Fib key level of the first wave.
Similarly, one can also use the 161.8% Fibonacci extensions of the third wave or of the 5th minor wave of an extended third wave to confirm that a fifth wave extension is underway. Typically, the 161.8 Fibonacci key level is primarily for breakout setups;l while the 138.2% relates to critical reversal zones. Not always but quite often.
Watch those 161.8% Fib key levels when you are applying the Elliott wave analysis.
Combining Fibonacci Sweet Spot Zone And Wave Analysis
As soon as the corrective phase starts after the trending phase, one must draw both the 50% and 61.8% Fibonacci retracements of the prior trend.
The zone between those Fib key levels is known as the sweet spot zone. The word sweet in that instance relates to the fact that bullish reversals often take place in that zone. It also sweet because one is getting more 50% discount in relation to the highest price level at the end of the bullish trend.
One should not bet that definitely a reversal will take place in that zone.
Note that financial instruments with a solid balance sheet like Apple Computers do often tend to reverse in that zone in a healthy financial market environment.
38.2% Fibonacci Retracement And Waves Count
Elliott traders must draw the 38.2% Fibonacci retracement of the third wave as soon as the its common sense trend line is broken.
One expects a swallow 4th wave that often fails to cross that level. Some stocks do consistently break that level and reach the 50% Fib retracement level. In those instances, it is more likely to be one of the financial instrument's characteristics. Check past fourth Elliott waves.
Be aware of the 2nd wave that ends at the 38.2% Fibonacci retracement level of the 1st wave. That is usually the case after an extended or complex 1st wave that is subdivided into five clean-cut minor waves. Sometimes, the price will drop to the 50% Fib level, but will quickly pull back by exhibiting a long tail cnadlestick bar on the immediate higher time frame.
Please do not worry if there is anything you do not fully grasp at this point. Just post your relevant questions at 24Elliottwaves YouTube channel, and I will take care of it in due course. Alright, no worries please.
Where was I again?
Indeed the Elliott wave traders that have been following me for years know about the irregular first wave after an IPO (Initial Public Offering). They must watch the zone between the 38.2% and 50% levels for a possible starting point of the 3rd wave if one is dealing with a company that is making a lot of cash in a booming sector.
Fibonacci Patterns Versus Elliott Wave Correction After A Trend
An Elliott wave trader must endeavour to master all the Fibonacci patterns. There is no excuse for that if one wants to avoid clashing with the Fibonacci traders during the Elliott wave corrective phase.
Not a good thing to clash with the financial markets elephants. One does not want to be a bloody nose Elliott wave trader.
I have done it as a learner. So please do the same thing.
I do not know about you, but if I really like something, and I want to do it, I always give hundreds percent. A lot of people can learn very fast, but they can rest assured that when they finally quit, I will stay put till the end. Am I encouraging someone out there? May be. Alright let's move on.
Really when an Elliott wave trader begins to spot, understand and interpret all the activities of the Fibonacci traders, he or she is no more an ordinary Elliott wave trader. Many wave traders do clash with the Fibonacci traders without knowing until their nose turns completely red like a chimpanzee bottom. Alright, you get the message.
The only way to avoid the fight with those elephants is to master every aspect of Fibonacci strategies. That is it.
Wave And Fibonacci Structures
By the way, how are you finding this article so far? Thumbs up or down? Now breath in and let it out through your mouth. That was your short break. I would like to thank for reading this article up this point. I really appreciate that.
When it comes to using the predictive fractal patterns of both the 1st and second waves to predict both the trending and corrective phases, one will combine Elliott wave analysis and Fibonacci structures.
I mean one is taking into consideration the Fibonacci retracements and extensions of the mirror waves of both 1st and 2nd waves to forecast the minor waves and Fibonacci structures of both the trending and corrective phases respectively.
If what I am discussing now does not make sense to you now, do not worry because in the very new future I will be writing an educational article about how to use the predictive fractal patterns like an advanced Elliott wave trader.
Of course there are wave traders who already know what I am talking about.
Precise 50% Fibonacci Retracement And Zigzag Pattern
This one is not a long discussion because all one really needs to remember is that the B minor wave of the zigzag pattern often delights to stop precisely at the 50% Fibonacci retracement of its A minor where the C minor wave begins.
Of course, this not one plus one always equals two. Nevertheless, one wants to keep that in mind especially if one is a swing trader or investor. It is really pleasing to take a clean-cut trading signal at the point to participate in the C minor wave without losing of course.
It goes like this: trending phase has ended, then comes 1, 2, 3, 4, 5 (A minor wave) that is corrected by 1, 2, 3 (B minor wave) ending at the 50% Fibonacci retracement of the A minor wave before the C minor wave kicks in 1, 2, 3, 4, and 5.
Now when everyone trades it like a pro without messing it up, that feeling is unforgettable. Let me know how it was for you after you have traded it like a pro.
Am I talking too much again? Forgive me. Alright, I will stop here for now. If I forget anything, I will come back another day to update the article.
Do not hesitate to post your questions and comments at 24Elliottwaves YouTube channel, and in due course I will answer them or post a mouth watering educational Elliott video in my beautiful Texas accent.
Alright, I live in London, but record videos in Texas accent. That was to make you smile a bit.
After reading this article in full, many faithful wave traders friends with agree with me for the first that an Elliott wave trader is truly an advanced technical trader because he or she is combining both the Elliott wave principle and Fibonacci trading to squeeze the best out of the financial markets.
One may argue and say: I am an Elliott wave trader, and I do not care about Fibonacci trading. That is fair, but as one sees now, Fibonacci really complements the waves analysis like a happy wife becomes one with her husband.
It is up to you if you really want to bring your Elliott wave analysis to the next level. Are you ready or not? Do not answer that question, but just make a firm decision without looking back.
Sip that last drop of your favourite drink.
That is it Elliott wave friends and foes. Was this article useful? If your answer is yes then please share and bookmark it. Please, remember also to say few good words about us in your favourite Elliott wave or Fibonacci trading forums. I will really appreciate that.
I wish you the very best. Happy Trading To All
This article is written by G Beaulieu Founder of 24Elliottwaves.com Website