If there is something that ties all of Elliott Waves Theory together, it is the Fibonacci ratios or levels. Every single pattern or concept within the theory depends on a Fibonacci ratio.
The golden ratio
The golden ratio or the 61.8% level alone is responsible for many rules within the theory:
- the b-wave of a flat pattern must retrace beyond the 61.8% of the a-wave,
- the b-wave of a zigzag must retrace less than 61.8% of the a-wave,
- in a horizontal triangle, the b-wave should not end around 61.8% of the a-wave,
- the x-wave in a double or triple combination, zigzag or flat, should NOT exceed 61.8% of the previous correction,
- the x-wave in a running correction will ALWAYS be longer than 61.8% of the previous correction.
These are just a few examples showing the importance of the golden ratio in the Elliott Waves Theory. Some of them appear in the image below:
The 161.8% level
The 161.8% level defines the minimum length of an impulsive move’s extended wave, and is the second most important Fibonacci ratio, following the golden ratio.
An impulsive wave has an extended wave, one that stands out from the rest. For any five-wave structure to qualify as an impulsive move, either the 1st, 3rd or 5th waves must be longer than 161.8% of the next longest wave.
The 161.8% ratio emphasizes the difference between different types of flats too. In this section of the course, we will cover all the various flat patterns. Some flats have a c-wave longer than 161.8% of the previous b-wave; these are elongated patterns and have a unique interpretation within the Elliott Theory.
The 38.2% level
There are two cases in which the 38.2% level plays a crucial role:
1. when trading the fourth wave in an impulsive move:
- the 4th wave rarely retraces beyond 38.2% of the previous 3rd wave.
2. when trading the b-wave of a zigzag:
- typically, the b-wave of a zigzag is just a small pullback;
- if the market has the power to retrace beyond the 38.2% level, the chances are it will form another pattern and not a zigzag.
The 23.6% and 123.6% levels
These two levels refer to zigzags and flats. Most of the time the b-wave of a zigzag retraces only 23.6% of the previous a-wave, and the minimum retracement condition is just 1%.
As for the 123.6% level, the more of a flat’s c-wave that exceeds this level (when compared with the previous b-wave), the smaller the probability that the future price action will retrace the entire flat pattern.
- The golden ratio is key to the Elliott Waves Theory.
- The 161.8% is the second most important level after the golden ratio.
- 38.2% is used when trading the b-wave of a zigzag, or the 4th wave of an impulsive move.
- The minimum retracement level for the b-wave of a zigzag is 1%.