On Fibonacci Ratios and the Square Root of Two Part I, we talked about the history behind the Fibonacci sequence and how ratios were computed. On part two, we are going to describe how Fibonacci and sqrt-2 ratios show up in the Elliott Wave structure.
Usual wave relationships
Ian Copsey in his book The Case for Modification of R.N. Elliott’s Impulsive Wave Structure says that, after many research hours into common relationships between waves, he has found the most usual to be:
Fibonacci: 5.6%, 9%, 14.6%, 23.6%, 33.3%, 38.2%, 50%, 61.8%, 66.6%, 76.4%, 85.4%, 91%, and 94.4%
To this list, we can add the square root of two derivations: 41.4% and 58.6%.
And, specifically on Wave (iii), it’s possible to take those ratios and add 100%, 200% and on occasions 300% and 400%.
The most common extensions he has found very frequently were: 138.2%, 176.4%, 223.6%, 261.8%, 276.4%, and 285.4%. Additionally, but less frequently, he found 158.6%, 166.7%, 238.2%, and 361.8% and occasionally 423.6% and also 461.8%
It’s important to observe the underlying ratios of a particular market trend. It’s better to stick with the ratios that often shows in the most recent retracements of the same kind. As is usual, the help of visual trend channels, spotting important supports and resistances or pivot points may show which one of those ratios best fit the rest of the clues.
It is also noteworthy that the projections of the Wave (v) and also of the Wave (c) should match the end of higher order waves as well, so the most probable final ratio is the result of that confluence.
The data below were taken from Mr Copsey’s study, published in the referred book.
Wave (i)
There is no relationship to any previous wave as this is the start of a five wave sequence.
Wave (ii)
This wave is a corrective wave of Wave (i). This retracement is one of the most difficult to assess. According to Ian Copsey it can go from 14.5% up to 100%. He also mentions that on a 5 min chart it’s very difficult to observe the sub-waves composing wave(ii), however on a daily chart it shows the typical A-B-C pattern or, even, more complex patterns.
Wave (iii)
Wave (iii) is an extension of Wave (i), projected from the end of wave (ii).
Projections:
- The most typical forecast are 176.4%, 185.4%, 190.02%, 223.6%, 276.4%, and 285.4% projections of Wave (i).
- Less recurring projections are: 138.2%, 166.7%%, and 261.8%.
- Sporadically it goes to: 123.6%, 238.2%, 361.8%, 423.6%, and 476.4%.
Wave (iv)
Wave (iv) is, of course, a retracement starting from the top of Wave (iii). At this stage, noting the implications of the alternation rule with wave (ii) or Wave (b) there is a stronger basis to identify the end of the pullback.
Potential retracement percentages:
- For small retracements: 14.6%, 23.6%, 33.3%, and 38.2%.
- For mid retracements: 41.4% and 50%.
- For intense retracements: 58.6% and less often 61.8% or 66.7%.
Wave (v)
Wave (v) is an extension of the total price move from the beginning of wave (i) to the end of Wave (iii), projected from the end of Wave (iv).
Having identified Wave (iv) makes it much easier to build up a projection for wave (v).
Projections:
- The bulk of projections go to 61.8%, 66.7%, and 76.4%.
- In a truncated Wave (v), the usual ratios are 58.6% and 50%.
- In an extended Wave (v), the most usual projections are: 85.6%, 100%, 114.4%, and sometimes 123.6% and 138.2%.
Wave (A)
Wave A is similar to Wave (I) in its unpredictability. There is no reference to spot its end because there is no relation with other prior waves. The best method is to find a higher order price channel in which this wave might end, or find support/resistance levels or pivot points.
Another method is to go to a shorter time frame, watch the 5-wave pattern that constitutes the A wave and try to project wave (v) by matching it with a previous Wave b of Wave (v) or the prior Wave (iv).
Wave (B)
Wave B is a retracement of wave (A), but it’s a correction within a correction, so it can be really complicated and random. The retracement ratios range from 15% to 100%. The use of pivot, swing high and low, and support/resistance levels give more clues than simple mathematical ratios.
As stated in other articles, it doesn’t pay to trade wave B or any other 3-wave corrective pattern, for the matter because of its poor reward-to-risk ratio.
Wave (C)
Wave (C) is an extension of Wave (A) projected from the end of Wave (B).
Projections:
- The most usual projections are: 100%, 105.6%, 109.2%, 114.4%, 138.2%, and 161.8%.
- Less common are: 76.4%, 85.6%, 123.6%, and 176.4%.
- Sporadic projections are: 123.6%, 223.6%, and 261.8%, but, sometimes as short as 61.8%.
Important to note that Wave (C) is related to the next higher and lower degrees. Thus, its sub-wave v should, also, match Wave (A) extension and, if it’s part of a higher degree’s Wave (iii) or Wave (v), their possible projections.
Wave (x)
Wave (x) usually retrace similarly to Wave (b)
Triangles
Wave a: retraces deeply. In a Wave(iv) this exceeds 50% of Wave (iii)
Wave b: commonly retraces beyond 76% of Wave a
Wave c: projects 66.7% to 76.4% of Wave a, from the end of Wave b
Wave d: 66.7% to 76.4% of Wave b from the end of Wave c
Wave e: a zigzag less than 66% of Wave d
Expanded Flat Corrections
Wave a: 50% of the preceding wave
Wave b: 15% to 38%, occasionally as low as 9% and rarely up to 41%
Wave c: Back to the end of Wave or beyond.
Final guidance
These values are only a guide. Every market has its characteristics; therefore you should know them to trade efficiently. Additionally, every timeframe behaves differently.
In intra-day trading, you should add pivot points to this analysis as pivots are used heavily by professional traders.
Visual clues offer better information than numerical values. If the projection or retracement touches a trendline drawn on price channel or support/resistance area, then the chance of that projected value increases substantially.
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