14.4 Trading Elliott Wave with Fibonacci Part 1

Elliott waves

Trading Elliott Wave with Fibonacci - Text Version

After Ralph Elliott identified the wave structure in markets, he connected his Elliott Waves to Fibonacci levels. This has practical implications for being able to trade Elliott Wave as it can help confirm your Wave Counts and help you find entry and exit points.

Most traders want to trade in line with the overall trend. In Elliott Wave terms, that means trading in line with the motive waves in an Impulse Sequence, trading either a Wave 1, Wave 3 or Wave 5.

Wave 1 is the least popular amongst Elliott Wave traders and Wave 3 is by far the most popular to trade

Why is Wave 1 the least popular? Wave 1 begins a new trend and finding the very beginning of the trend is often the hardest thing to do as a trader. Some traders refer to it as trying to catch a falling knife. You may get it right some of the time, but when you get the timing wrong, it’s painful as the previous correction is still moving against you.

Why is Wave 3 the most popular? As you may remember from the Elliott Wave rules, Wave 3 cannot be the shortest motive wave and is often the longest motive wave. That can provide excellent rewards. To enter at the beginning of Wave 3 means locating the end of Wave 2.

To use Fibonacci retracements to locate the end of Wave 2, locate the Fibonacci tool on your charting platform.

Zero percent marks the end of Wave 1, and one-hundred percent marks the beginning of Wave 1. There are many Fibonacci levels in between zero percent and one-hundred percent. Which levels are the most appropriate to use for finding the end of Wave 2? Wave 2 tends to retrace quite deeply into Wave-1 so Elliott Wave Practitioners like to use fifty percent, sixty-one point eight percent, and seventy eight point six percent. Fifty percent is not strictly considered a Fibonacci level but it is accepted by Elliott traders. Sixty one point eight percent is the common Fibonacci Golden Ratio and seventy eight point six percent is the Golden Ratio squared.

Is there a logical place for a stop-loss when trading the beginning of Wave 3? One of the Elliott Wave rules is that Wave 2 cannot go past the beginning of Wave 1. Consequently, [emphasize the next highlighted section] the start of Wave 1 provides an excellent place for a stop-loss. If you are using a deeper Fibonacci retracement level such as Sixty-one point eight percent or seventy eight point six percent, you can potentially get excellent reward risk ratios.

In the next lesson, we are going to look at how Fibonacci analysis can be applied to trading Wave 5 in the Impulse Sequence.