Fibonacci and Elliott: Advanced Technical Analysis#

Fibonacci retracements and Elliott Wave theory are among the most powerful tools in technical analysis. Used for decades by professional traders, they help identify key price levels and make sense of the cyclical structure of markets.

Fibonacci Retracements#

The Fibonacci sequence (1, 1, 2, 3, 5, 8, 13, 21...) produces ratios that recur in nature and in financial markets. The key levels are 23.6%, 38.2%, 50%, 61.8% and 78.6%. The 61.8% ratio (the "golden ratio") is considered the most significant.

How to Draw Retracements#

1. Identify a significant move (swing high to swing low, or the reverse)
2. Draw the Fibonacci tool from the low to the high (in an uptrend) or the reverse
3. The 38.2%, 50% and 61.8% levels are the most likely bounce zones
4. Combine with other indicators (volume, RSI) for confirmation
5. The 61.8% level is often the last line of defense before a trend reversal

Elliott Wave Theory#

Ralph Nelson Elliott discovered in the 1930s that markets move in predictable patterns he called "waves". A complete cycle consists of eight waves: five impulse waves in the direction of the primary trend, followed by three corrective waves.

The Structure of Impulse Waves#

Wave 1: the start of the move, often overlooked. Wave 2: a correction that does not retrace beyond 100% of wave 1. Wave 3: the longest and most powerful (never the shortest). Wave 4: a moderate correction that does not overlap the peak of wave 1. Wave 5: the final push, often accompanied by an RSI divergence.

The Structure of Corrective Waves#

The corrective waves (A-B-C) follow the five impulse waves. Wave A begins the correction, wave B offers false hope of a recovery, and wave C completes the correction, often with intensity comparable to wave A.

Combining Fibonacci and Elliott#

Fibonacci levels apply naturally to Elliott waves. Wave 2 typically retraces 50-61.8% of wave 1. Wave 3 often extends to 161.8% of wave 1. Wave 4 retraces 38.2% of wave 3. These confluences considerably strengthen the reliability of the levels.

• Wave 2 → retraces 50% to 61.8% of wave 1
• Wave 3 → extends 161.8% of wave 1 (the most common)
• Wave 4 → retraces 38.2% of wave 3
• Wave 5 → equal to wave 1, or 61.8% of waves 1 to 3
• Wave C → often 100% or 161.8% of wave A