Elliott waves and Fibonacci are two frequently used indicator tools in the foreign exchange market. Combining the wave principle with the Fibo tool will bring a higher probability of efficiency to investors. However, to combine the use of both requires investors to be knowledgeable. So let’s join Forex Trading to learn about this trading method
Analysis of Elliott waves and Fibonacci in Forex trading
Fibonacci and Elliott’s waves combined in technical analysis will help investors have better trading strategies.
Basics of Elliott Waves and Fibonacci
What is the Fibonacci sequence? This is an infinite series of numbers starting with 0 and 1. This series includes numbers like 0,1; first; 2; 3; 5; 8; 13;…. The number at the back of the Fibo sequence will be equal to the previous 2 numbers added together.
In the financial investment market, the Fibonacci tool is often used as an expansion or retracement threshold. With these expansion and retracement thresholds, investors can completely find profit-taking and stop-loss points at the best prices.
Besides, Elliott’s wave helps investors explain the causes of increases and decreases caused by psychology. These increases and decreases will often be expressed through repeating patterns. The waves are often related to each other and have a ratio of 2.618; 1.618;… This helps the price target of the extended wave to be determined more accurately
How are Elliott waves and Fibonacci related?
Fibonacci and Elliott waves have a close relationship with each other. First, Fibo helps control the analysis of the wave. The better the Fibo ratio from wave calculations, the higher the accuracy of the wave. The waves are often related to each other according to the fibo ratio of 2.618; 1,618; first; 0.618;…
In fact, when analyzing, researchers discovered that the main wave structure is an internal structure consisting of impulse and correction waves. The Fibo ratio between waves will be related to price and time. The price and duration of the wave will be related to the Fibo ratio through the 0.618 or 61.8% zones.
In financial markets, the ratio between Fibo and waves is not simply the golden ratio but it also includes internal variations. These variations are calculated according to a square root relationship. Accordingly, when a sequence of numbers has completed one rotation cycle, it will be transferred to the next rotation using the square root relationship.
See more: Profession forex trade thanks to Fibonacci applying
Technical analysis of the structure of the wave
In a cycle of Elliott wave and Fibonacci, whether the trend is up or down, it will include 5 waves. Including wave 1, wave 3 and wave 5 are impulse waves while wave 2 and Wave 4 are correction waves.
Technical analysis of the structure of waves 1-2
Wave 1 is the first wave and starts from a downtrend market. Because of this, recognizing wave 1 is quite difficult. The market trend before the first wave appeared was still mainly down. Trading volume increased slightly following the upward price trend. However, this increase is not too significant. Because of this, many technical analysts do not recognize the existence of wave number 1.
Wave 2, if based on the trading fibonacci ratio, will rebound to at least 38.2% but the possibility of reaching 61.8% will be higher. Most of Wave 2 will retrace in the area of Wave 4 around Wave 1. The reason wave 2 has a large retracement is because many investors believe that the market will have a long-term downtrend.
Analyze the 3-4 wave structure of Elliott waves and Fibonacci
Wave 3 is an extended wave and tends to last the longest among the 3 waves 1,3,5. At this time, wave 3 will tend to be 161.8% or 261.8%. To be able to identify Wave 3, investors need to pay attention to the slope of the wave. As for Wave 3, its slope will be higher than Wave 1 and almost vertical.
Wave 4 is similar to wave 2, it will retrace to 38.2% or 61.8% compared to wave 3. In case wave 3 extends, wave 4 will usually only retrace to 23.6% or 38.2%. In case the market runs very strongly, wave 4 only recovers 14%.
Analyze the structure of Elliott Wave 5
Comparing wave 5 to wave 1, wave 5 will often equal wave 1 or a 61.8% gap. Wave 5 can also be equal to wave 1 and wave 3 combined. If wave 5 is an extended wave, it will be 161.8% of wave 3. Or it can also be 161.8% of both waves 1 and 3 combined. Investors should note that if wave 5 is not an extended wave, there will likely be a peak-bottom divergence in waves 3 and 5.
A method combining the Elliott waves and Fibonacci
As mentioned, Elliott Wave and Fibonacci are two indicator tools that are closely correlated. Combining both indicators and tools will help investors increase their winning percentage in the foreign exchange market.
Use the Fibonacci Cluster to find price targets
Using the Fibonacci concentration zone will help investors set price targets with greater accuracy. Besides, the advantage of Elliott waves is also to provide clear and reliable price targets. Elliott Wave and Fibonacci have a close proportional relationship, so investors can find the Fibo gathering area for price targets.
Let’s follow this case, the Fibo cluster zone is determined to be 206-212. They are created by wave 5 consisting of 1 times wave 1-wave 3. Wave 5 is 2.618 times wave 4. And finally, the ending point of wave 5 is 1.618 times wave 1-wave 3.
Combine Elliott wave and Fibonacci when trading forex
The Fibonacci sequence is also closely connected to the 1.618 golden ratio. Researchers have found that investors often use this ratio. These ratios are related to the setup for support and resistance levels.
Specifically, these prices will help determine the reference index of a trend. Fibonacci is simply a series of numbers that are added next. Looking at the image below, investors can see the combination of Fibonacci with Elliott waves. The first wave 1 was formed with a Fibo ratio of 38.2%. Wave 2 with a support span of 23.6%. Wave 3 also reached the highest threshold with fibro at 78.6%. Finally, the correction of the Fibo support zone is 50%.
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Conclude:
In fact, combining Elliott waves and Fibonacci is quite difficult because they require investors to have professional-level expertise. For long-time investors, they have experience in the market and a strong mentality, which is also something that helps them make money in the financial market. To learn more knowledge about the field of foreign exchange, please follow Forex Trading more often.
FAQs
Can Fibonacci and Elliott waves be separated?
Although Fibonacci and Elliott have a close relationship, they are two different tool indicators. Investors can completely separate and use them individually.
What tools help investors find reliable price targets?
The Fibonacci Cluster and Fibonacci Divider are two tools that can help investors find price targets with high reliability.
Besides the 5 extended waves, does Elliott have other waveforms?
Elliott Wave also has different corrective waveforms including corrective waves A, B, and C
