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Application of Fibonacci retracement levels to Elliott wave

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The Fibonacci sequence is a sequence such that each number is a sum of two preceeding ones. Fibonacci numbers play a role in determining the strength of the waves and their length. The fibonacci sequence helps us to obtain the fibonacci ratios by dividing one number in the sequence by the next number. For example, the Fibonacci sequence is 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 etc. Hence dividing  34 by 55 (34/55) gives the fibonnacci ratio of 0.618.



There are five types of Fibonacci trading tools. These are arcs, fans, retracements, extensions and timezones. We are going to focus on the application of Fibonacci retracement levels to the Elliott wave.

Fibonacci retracement levels are horizontal lines that can be used to draw support lines, identify resistance levels, identify levels for placing stop loss orders and target profit levels. They are used to dertermine critical points where price action is likely to reverse. The Fibonacci ratios are 23.6%, 38.2%, 50%, 61.8% and 100%. Each level is associated with one of the above ratios or percentages. It shows how much of a prior move the price has retraced.

How to draw Fibonacci retracement levels

  • Go to insert>> Objects>>> Fibonacci Retracement Levels
  • Draw the line between two extreme points, that is, from a high to the opposite low or from a low to the opposite high.

Application of Fibonacci retracement levels to Elliott wave

  • The standard retracement ratio to the preceding wave makes up 23.6%
  • Wave two tends to retrace 61.8% or more of wave one, if it fails to retrace 61.8% of wave one then 50% retracement is likely to occur. 
  • If wave two retraces less than 50% of wave one, then there is a high probability that wave three will be extended
  • Wave four tends to retrace 38.2% of wave three. 


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