In an early article Positioning for Trend Changes using Elliott Wave Positioning for Trend Changes using Elliott Wave we discussed Fibonacci levels.
Make no mistake.
They're only as good as the reading of the chart. Misinterpretation of the price chart will make the Fibonacci retracement zones unreliable.
And could be why many traders have rendered the theory as less valuable than it is.
Learning the theory does take time. There are many nuances. Yet with time, practice and patience, the rewards can be immense.
Elliott had two main insights about Fibonacci relationships within waves. The first was that corrective waves tend to retrace the prior impulse wave by 38.2%, 50.0% or 61.8%.
The second was that impulsive waves tend to relate to each another in a Fibonacci sequence.
One example is that Wave-1's and Wave-5's are often of equal length.
Wave-3's often extend 1.618% of the Wave-1 length.
As such, the theory provides guidelines as to how far each wave within the 5-wave sequence is going to travel.
And where the corrective waves that follow are going to complete.
Note - these are guidelines. Not predictions.
Having a template that can provide an area of confluence gives a reference point for a possible turn.
From a timing perspective this tool can assist us to become better traders.
For pullbacks, Fibonacci levels can also tell us when our analysis of the trend is wrong.
Example: When a corrective wave retraces more than 61.8% of the previous move higher. The depth of the move has likely become too great. Symmetry has been lost.
Such a move would need us to rethink and reassess what the price action is doing.
Knowing when we are wrong is as important as knowing when we are right!
So that completes our 3 part series on the basics of the Elliott Wave Principle.
We apply this theory to live charts within both the ASX and Global Chart Research services. It's applied across any market; stocks, indices. FX, Commodities, Metals & ETFs.