Fibonacci Retracements and Elliott Waves in Graphical Analysis
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Fibonacci Retracements Overview
- Fibonacci retracements are a popular tool to mark potential support/resistance using Fibonacci ratios.
- Common levels: 23.6%, 38.2%, 50%, 61.8%, 78.6%.
- They help locate entries/exits by observing price reactions at these levels.
How Fibonacci Retracements Work
- Plotting:From low→high in uptrends (or high→low in downtrends), creating horizontal lines at Fibonacci levels.
- Support/Resistance:Levels may act as reaction zones where price reverses or consolidates.
- Continuation:If price holds a level, the trend often resumes, offering potential entries.
- Reversal cue:A decisive break beyond a key level can hint at a trend change.
Fibonacci Retracement Techniques
1) Fibonacci with Trend Lines
- Confluence with trend lines strengthens level validity.
- Look for alignment as high-confluence zones.
2) Fibonacci with Moving Averages
- When a level aligns with an MA, reliability improves.
- 50/200 MAs with Fib levels often mark strong reactions.
Benefits and Limitations of Fibonacci Retracements
- Benefit:Clear levels to plan entries, exits, and stops.
- Benefit:Works well with trend lines and MAs for validation.
- Limitation:Not standalone; relying only on Fib can produce false signals in volatility.
Elliott Wave Theory Overview
- Studies price as waves to infer direction via cycles/patterns.
- Five-wave impulses and three-wave corrections (A-B-C).
- Used to anticipate continuation, reversals and retracements.
How Elliott Waves Work
- Impulse waves:Five waves in trend direction; 1,3,5 with trend; 2,4 corrective.
- Corrective waves:Three waves (A-B-C) against the primary trend.
- Wave ID:Identify patterns to time trend continuation or endings.
- Ratios:Fib ratios frequently align with waves (e.g., 2/4 retracements, 5 extensions).
Elliott Wave Techniques
1) Use Impulses/Corrections to Map Trends
- Impulses show trend strength/direction; corrections mark pullbacks.
- Enter with impulses; use corrections to anticipate retracements.
2) Combine Elliott Waves with Fibonacci
- Fib ratios appear within waves (2/4 retrace; 5 extends).
- Blend Fib retracements with counts to project targets/turns.
Benefits and Limitations of Elliott Waves
- Benefit: Structured lens for market cycles and reversals.
- Benefit: Pairs well with Fibonacci for targets and stops.
- Limitation: Can be complex/subjective; counts vary.
- Limitation: Mislabeling waves leads to poor predictions.
