Trading with Fibonacci Retracement

Retracement Ratios: Waves tend to retrace either exactly, or in relationship to, a Fibonacci ratio. As we discussed earlier, "primary" retracement ratios include 0.382, 0.50, 0.618, 1.0, 1.618, and 2.618. These are also commonly expressed in percentage terms.

Secondary and Tertiary Retracement Ratios:

  • 0.786, the square root of 0.618. Retracements will commonly fall in the 0.77-0.786 range.

  • 2.236, is the square root of 5, the most important number in the Wave Principle and key to the composition of the Golden Ratio (2.236 + 1)/2= 1.618; (2.236 -1)/2= .618.

  • Similarly, retracements of 0.236 (0.6183) are also prevalent, especially in corrective waves.
  • Our work at Market Harmonics has also found .89 (the square root of .786) to frequently occur in deep retracements.

The value of these ratios is that taken with correct wave labeling, the ability to forecast price targets can be amazingly accurate.

SOEX

Impulse Wave Relationships
We noted previously that in impulse waves, the non-extended waves (usually 1 & 5) will tend towards equivalence in length and time of formation. Since wave 3 is generally the longest wave, it will often (though not always) be 2.618 the length of waves 1 and 5. Where the waves are not of the same length, a Fibonacci relationship usually exists between them. Similarly, a Fibonacci relationship generally exists between waves 2 and 4 in the cases where one of the waves exceeds the length of the other. Finally, wave 4 often divides the entire impulse sequence by the Golden Ratio.

Corrective Wave Relationships
In 3-wave corrections, we look particularly for Fibonacci relationships that exist between waves A and B, and waves A and C. In A/B relationships, B will often be shorter, especially in a zigzag, with Fibonacci retracements of 0.382, 0.50 and 0.618 the most common. In a flat, B can be equivalent or even a bit longer than A. In A/C relationships, C is generally equal to or greater than A in length, and in cases where it is longer (or shorter) will generally be related to A by a Fibonacci ratio, most commonly .618. In an irregular (or expanded) flat correction, wave C can exceed A by as much as 1.618 or 2.618. In triangles (and as another example of the alternation guideline) at least one wave is related to its alternate by .618, or occasionally .786 (i.e.., wave A with C, B with D, or C with E).

continue... Fibonacci Analysis Part 4