The Fibonacci Retracement and Elliot Wave are referred to as objects in Forex trading. The main purpose of these two is to show when a trend is about to reverse. The Fibonacci Retracement also shows when a pullback is about to end.
Fibonacci Retracement And Elliot Wave Patterns
To understand the Fibonacci retracement, we have to discuss;
First, the Fibonacci retracement levels. The Fibonacci retracement levels are horizontal lines that aim to highlight possible support and resistance levels where the price is expected to retrace.
This tool best works when the market is trending. Traders intend to buy or go long on a retracement at these support levels or to go short or sell on a retracement at a Fibonacci resistance level when the market is trending down. This indicator is said to be predictive as it predicts where the price might head in the future.
The thinking behind the Fibonacci retracement is that after the price begins a new trend direction, the price will retrace or return partway back to a previous price level before resuming in the direction of its trend.
How To Find The Fibonacci Retracement Levels:
- Find the recent major swing highs and swing lows for both uptrends and downtrends.
- For downtrends, click on the swing high and drag the cursor to the most recent swing low.
- For uptrends, click on the swing low and drag the cursor to the most recent swing high.
Elliot’s Wave Theory
This theory proposes that the markets behave in repetitive cycles, which could be predicted. These cycles represented the emotions felt in the market by investors, which were caused by outside influences or by the predominant psychology of the masses in the market.
These upward and downward cycles represented by the collective investor psychology show up in the same cycles reflected in the market. These swings are what Elliot referred to as waves. These 5 waves are the same whether the market is bullish or bearish.
The Elliot wave works with the concept of fractals. A fractal is a figure or shape that has the same characteristics as the whole; this means that the smaller parts of the big part have the same characteristics as the big one. In Elliot’s wave, there is a bigger wave, and when you zoom in, there are smaller waves. These smaller waves have the same 1, 2, 3, 4, and 5 wave patterns as the bigger waves.
Once you have mastered these waves you will be able to detect at which point the market wave is and thus know what to expect next thus giving you a clearer view of the market.
Elliot’s Wave Theory Five Waves
- Wave 1,3,5: Symbolizes the direction of the market.
- Wave 2 &4: These are counter moves to wave 1,3 and 5.
- Wave 3: This is the longest wave of them all.
- Wave 2: The level of wave 2 shouldn’t cross the level of the start of wave 1.
- Wave 4: wave four shouldn’t cross the level of the end of wave 1.
“A correction” happens after the end of wave five, but before the market changes momentum. If the market was in an uptrend, it would form the 1,2,3,4, and 5 Elliot waves, go into a correction phase, change momentum into a downtrend, and vice versa.
To ask questions on anything you have not understood so far head over to the Forum section and our community will answer all your questions.