Elliott wave has a very close relationship with Fibonacci, especially extension ones. The wave calculations of the master and corrective wave patterns (5 + 3 = 8) are according to the Fibonacci sequence and the division of the wave patterns into the respective internal waves also completely generates the Fibonacci sequence.
- 1 The importance of analyzing the relationship between Fibonacci and price fluctuations
- 2 Elliott Extension Wave 1 in relation to Fibonacci
- 3 Elliott Extension Wave 2 with Fibonacci
- 4 Elliott Extension Wave 3 in combination with Fibonacci
- 5 Elliott Extension Wave 4 with Fibonacci
- 6 Elliott Extension Wave 5 with Fibonacci
- 7 Extension wave target
The importance of analyzing the relationship between Fibonacci and price fluctuations
First of all, it helps to control the wave analysis. The better the Fibonacci ratio from the wave calculation, the more accurate that wave calculation will be. Because in one way or another, the waves are related. Furthermore, realistic goals can be predicted once the wave calculation is determined correctly or different scenarios are distinguished.
The waves are usually related to each other in ratios of 2.618, 1.618, 1, 0.618, 0.382, and 0.236. This helps in estimating price targets for extension waves.
Elliott Extension Wave 1 in relation to Fibonacci
This first wave has its origin in a bear market (recession). Therefore, wave 1 is rarely recognized in the first place. At this time, the basic information is still a negative one. The direction of the market before wave 1 occurs is still mainly a recession. Trading volume increases slightly in the bullish direction of the price. However, this price increase is not significant. Therefore many technical analysts do not recognize the presence of this wave 1.
Normally, we do not trade on wave 1. So we will wait for wave 1 to complete to calculate the amplitude of the next waves.
Elliott Extension Wave 2 with Fibonacci
Wave 2 retraces at least 38.2% but mostly 61.8% or more in comparison with wave 1. It usually retraces in the area of wave 4 (of a smaller wave level) of wave 1 and frequently enters wave 2 (of a smaller wave level) of wave 1. The retracement level of more than 78.6% is very doubtful even though it has not broken any rules yet. The reason why wave 2 has a large retracement rate is that most investors think that the long-term downtrend will continue and wave 1 is just a counter-trend pullback. This is the behavior of the bearish selling wave.
Elliott Extension Wave 3 in combination with Fibonacci
Wave 3 is at least equal to wave 1, except for the Leading Diagonal and Ending Diagonal patterns (with these 2 waveforms, wave 3 is shorter than wave 1). If wave 3 is an extension wave and is the longest of the master waves 1, 3, and 5, then it will tend to be equal to 161.8% or even 261.8% or 461.8% of wave 1. To recognize wave 3, pay attention to its slope. Because wave 3 is usually steeper than wave 1 and almost vertical. In addition, it is necessary to pay attention to the technical indicators in the area of wave 3. Because then the volume will be higher, the momentum will be stronger.
Elliott Extension Wave 4 with Fibonacci
Wave 4 usually retraces 38.2% or 50% or 61.8% from wave 3 if wave 3 is not an extension. In the case of an extended wave 3, wave 4 usually retracements 23.6% or 38.2% of wave 3. In very strong markets, wave 4 only retraces 14% of wave 3.
Wave 4 usually retraces to the price zone of wave 4 (of the lower wave level) of wave 3.
Elliott Extension Wave 5 with Fibonacci
Wave 5 is usually equal to wave 1 or moves a distance of 61.8% of wave 1’s length.
It could also be 38.2% or 61.8% of the total length of wave 1 and wave 3 combined (from the base of wave 1 to the top of wave 3).
If wave 5 is an extension, it will be 161.8% of wave 3 or 161.8% of the total length of waves 1 and 3 combined.
Note: If wave 5 is not an extension, there will be a divergence between the top/bottom of wave 3 and wave 5. If wave 5 is an extension, it is very unlikely that such a divergence will occur.
Extension wave target
In the master wave sequence consisting of 5 waves 1-2-3-4-5, we expect one of the 3 waves 1, 3, 5 to extend. If wave 3 extends, then wave 1 and wave 5 will tend to be equal in price swing length, or equal in price swing length.
In the Forex market, extension wave 3 accounts for 60% while extension wave 5 accounts for 35%, and extension wave 1 accounts for only 5%.
When the extension wave in a 5-wave sequence is wave 1, the next correction will return to the area of wave 2 instead of the usual 4th wave. This is especially true in the case where wave 5 is shorter than wave 3.
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