What is the relationship between Fibonacci and Elliott waves? When combined, what will the Fibonacci sequence and Elliott wave indicator do for traders when trading coins? Let’s explore this combination with Crypto Trading in the following article.
Overview of Fibonacci and Elliott Waves
Fibonacci and Elliott waves are two very important indicators in the financial markets.
What is the Elliott Wave Indicator?
Elliott Wave was developed by Ralph Nelson Elliott, a famous American accountant, in 1938. This is a technical analysis model in the financial market. Elliott Wave theory was formed in the early 20th century. This theory is based on Elliott’s observation of the repetition of wave patterns in the stock market.
The Elliott Wave model explains that financial markets move in repeating wave cycles. These cycles consist of up and down waves, which are further divided into smaller waves. By analyzing the psychology of the crowd through each wave cycle, investors can predict long-term trends and future market movements.
Structure of Elliott Wave
The Elliott wave model is divided into two main phases: Impulse wave and Corrective wave.
- The Impulse wave phase (moving in the main direction of the market) consists of 5 different waves. Waves 1, 3 and 5 are impulse waves, following the main trend, while waves 2 and 4 are retracement waves. Retracement waves 2 and 4 move against the main trend.
- Corrective wave phase consists of 3 waves, denoted as A, B, C or a, b, c. In which, waves A and C are impulse waves, and wave B is recovery wave.
Elliott Wave is a tool to help predict future price trends. Each wave cycle in the Elliott Wave indicator structure always consists of 8 waves and 2 phases, regardless of whether the market trend is up or down.
Elliott Wave Counting Principles
To count Elliott waves accurately, traders need to adhere to the following three important principles:
- Wave 2 should not exceed the starting point of wave 3.
- Wave 3 must always be the longest wave of the total 5 waves.
- Avoid trading in the area of Wave 1 and Wave 4.
Adhering to these principles will help ensure accuracy in the technical analysis of the Elliott wave indicator.
How to identify the Elliott wave?
To know How to identify Elliott waves, traders must master the following principles:
- Wave 3 is always the longest wave in the Elliott wave pattern and usually extends about 161.8% of wave 1.
- Waves 2 and 4 tend to take turns in price corrections. Wave 4 will be weaker if wave 2 is strong and vice versa.
- After 5 impulse waves 1-2-3-4-5, ABC correction waves may form a bottom in the wave 4 area.
- Observe divergence and trading volume fluctuations to recognize when wave 5 is about to end.
- Wave B in the Elliott pattern has a maximum correction amplitude of only 61.8% compared to wave A. The starting point of wave B must cross the ending point of wave A.
See more: Elliott wave: learn principles, trade effectively
Learn the theory of Fibonacci retracement
Fibonacci Retracement is a technical analysis tool that uses Fibonacci ratios. The purpose of Fibonacci retracement is to measure how much the price has retraced from a previous high or low. It is based on the idea that markets tend to move in waves or cycles. After a significant price move in one direction, there will often be a correction or reversal in the opposite direction.
To use Fibonacci retracement levels, you need to identify two points on the price chart. These two points include the swing high and the swing low. Then, you will draw horizontal lines at the levels that correspond to the Fibonacci ratios. These ratios include 0%, 23.6%, 38.2%, 50%, 61.8%, and 100%.
Learn about the relationship between Fibonacci and the Elliott wave indicator
The combination of Fibonacci and Elliott waves will help traders determine the resistance-support levels for the waves currently in the market. Traders will recognize the parameters of the current trend more easily. Fibonacci retracement helps identify the adjustment limit of wave B. Note that it is only within 61.8% compared to wave A. That is, the starting point of wave B must pass through the ending point of wave A. This ensures the reasonableness of the Elliott wave indicator. Elliott waves combined with Fibonacci will help traders make more accurate decisions and increase the likelihood of success when trading coins.
Combining these two tools also allows traders to identify the main trend of the market based on previously determined resistance and support levels. Fibonacci and Elliott waves also act as price gauges. They create special frames, supporting more effective market analysis. To successfully combine these two tools, traders need to diligently cultivate knowledge and experience when investing in crypto.
How Elliott Waves Combine Fibonacci?
Let’s take a deeper look at how to combine Fibonacci and Elliott waves.
Combining Fibonacci and Elliott Waves: Basic Waves
What is special when Fibonacci is combined with 5 different wave levels of the Elliott wave indicator?
Combining Fib and Wave 1
Relying only on wave 1 to calculate the amplitude has many limitations. Instead, traders should consider other waves to get a complete picture of the market’s movements. When the market starts a downtrend, wave 1 is the starting point for the correction trend. From there, traders can see the whole picture of the market and come up with a suitable trading strategy.
Combining Fib and Wave 2
Wave 2 plays an important role in the Elliott wave analysis combined with Fibonacci. Wave 2 is considered a corrective wave of wave 1. After completing special conditions, wave 2 will create the base price for the next wave.
Wave 2 will end and retrace when it does not exceed the starting point of wave 1. The volume of transactions appearing in the Wave 2 area is not as much as in Wave 1. The downward correction range of wave 2 is usually between 0.382 and 0.618. The retracement range is at least 23.6% after the analysis is completed. In addition, the recovery range will include 3 ratios: 76.4%, 61.8% and 50%. These ratios need to be considered when evaluating and analyzing wave 2.
Combining Fib and Wave 3
Wave 3 is the strongest and most extended wave when applying Fibonacci and Elliott waves to analyze the price chart. However, if wave 3 is an ED or LD pattern, it can be equal to or shorter than wave 1. Compared to other major waves (1-3-5), wave 3 is usually the longest wave and has the potential to extend. Wave 3 has the potential to significantly extend compared to wave 1. Potential growth rates can reach 161.8%, 261.8%, and 461.8%. Thus, wave 3 can be considered the key to determining the trend when Elliott waves combine with Fibonacci.
Combining Fib and Wave 4
Wave 4 creates a correction after the strong increase of wave 3. Wave 4 gives the market time to recover and creates momentum for the next wave. In case wave 3 is not an Elliott wave extension, wave 4 will appear as a long double sawtooth shape. At this time, the correction levels will be 50%, 61.8%, and 38.2% if the price continues to decrease.
If wave 3 is extended, wave 4 tends to correct to the 38.2% and 23.6% Fibonacci levels. The volume of Wave 4 is usually lower than that of Wave 3. This represents a cooling off after the strong growth of wave 3. This is a common characteristic of corrective waves in the Elliott wave sequence.
Combining Fib and Wave 5
In the combined Fibonacci and Elliott wave theory, wave 5 acts as the completion point for a complete Elliott wave cycle. Wave 5 is usually the same length as wave 1. It can also be 61.8% shorter than wave 1. If calculated by the cumulative method from the top of Wave 3 to the bottom of Wave 1, the length of Wave 5 will be 38.2% or 61.8% of Wave 1.
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Elliott Wave combined with Fibonacci: Corrective Wave
What does Fibonacci and Elliott wave correction look like when combined?
Combining Fib and corrective wave A
Wave A is a sign that the market is starting a correction phase after a previous up/down cycle. After the end of the first 5 waves and entering the wave 4 area, the market is likely to recover at 38.2% or 50% of wave 3. This will be an important support level for traders to decide whether to buy or sell.
Combining Fib and corrective wave B
The retracement level of wave B in the Elliott wave pattern can vary between 38.3% and 61.8%. Compared to wave A, wave B in the Elliott wave indicator pattern usually has lower trading volume.
Combining Fib and corrective wave C
Wave C tends to extend to the same extent as wave A. However, the extension of wave C can sometimes reach 61.8%. In Flat and Zigzag Running patterns, wave C does not follow the general rules of length and position relative to wave A as in other Elliott wave patterns. Specifically, wave C will be longer or shorter than wave A in a Flat Running pattern. Meanwhile, wave C will be shorter than wave A in a Zigzag Running pattern. In addition, the extension of wave C can sometimes be affected by other underlying technical factors.
Combining Fibonacci Extension and Corrective Elliott Wave
The key to applying the Fibonacci extension method to trading is to identify extreme points (highs and lows) on the price chart. Based on the Fibonacci levels, traders can estimate the length of waves 3 and 5 in the correction. Some technical analysts believe that the ideal target for wave 3 is the 1.618 extension of wave 1. Meanwhile, the target for wave 5 is usually the 0.618 extension of wave 3.
To achieve profit targets when trading Elliott waves, the 3.618 and 2.618 Fibonacci levels are commonly used to estimate the length of wave 3. Although wave 3 can last longer than expected, traders can observe that the end of wave 3 usually occurs between 3.618 and 2.618. This trend can be identified by analyzing the typical wave structure of the market. If wave 3 ends at the 1.618 Fibonacci level before wave 5 ends, traders can pursue the next target to maximize profits.
summary
The article has provided information about the combination of Fibonacci and Elliott waves. This combination will create a powerful tool to help predict price trends more accurately. Don’t forget to follow Crypto Trading‘s blog if you are interested in coin investment.
FAQs
Is Elliot Wave Theory Effective in Crypto Trading?
Elliott Wave Theory works well but often requires experienced traders. Elliott Wave is a great tool for analyzing the market and understanding price movements.
What other indicators should Elliott Wave be combined with?
It is difficult to identify trading ideas based on Elliott waves alone. Traders can combine Elliott waves with other tools such as Fibonacci, MACD, etc. These tools will help traders understand price fluctuations more systematically.
How long does it usually take to complete 1 wave?
Impulsive waves usually complete faster. Whereas corrective waves take more time to develop.
