Overview — Why Waves & Fibonacci?

Elliott Wave Theory proposes that prices move in repetitive patterns driven by crowd psychology. While labeling is subjective, using hard rules and Fibonacci ratios can make analysis more systematic. Treat waves as a framework, not a prediction machine.

Impulse Waves — 5‑Wave Motive Structure

A complete bullish impulse consists of five waves: 1‑2‑3‑4‑5 up (with 2 and 4 corrective). In a bearish impulse, invert directions.

Hard Rules (must hold)

• Rule #1: Wave 2 never retraces beyond the start of wave 1.
• Rule #2: Wave 3 is never the shortest among waves 1, 3, 5 (and is often the longest/strongest).
• Rule #3: Wave 4 does not overlap wave‑1 price territory in a classic impulse (exceptions in some markets/diagonals).

Guidelines (common but not guaranteed)

• Wave 2 often retraces 50%–61.8% of wave 1.
• Wave 4 often retraces 23.6%–38.2% of wave 3 and tends to be shallow compared to wave 2.
• Alternation: if wave 2 is deep/sharp, wave 4 is likely shallow/sideways, and vice versa.

Corrective Waves — Zigzags, Flats, Triangles

Corrections unfold in three waves (A‑B‑C) or combinations:

• Zigzag (5‑3‑5): sharp countertrend move; A and C motive, B corrective.
• Flat (3‑3‑5): sideways correction; common variants: regular, expanded.
• Triangle (3‑3‑3‑3‑3): contracting/expanding; often wave 4 or B.
• Combinations (W‑X‑Y): two or more corrections linked by an X wave.

Fibonacci Retracements — Measuring Pullbacks

Retracement levels help estimate where waves 2 and 4 might terminate. Common levels: 23.6%, 38.2%, 50%, 61.8%, 78.6%.

• Wave 2: often 50%–61.8% of wave 1 (sometimes 78.6% in deep zigzags).
• Wave 4: often 23.6%–38.2% of wave 3; watch for triangle/flat behavior.

Fibonacci Extensions — Projecting Targets

Extensions (or projections) estimate targets for waves 3 and 5 and for wave‑C in corrections. Common ratios: 1.272, 1.618, 2.0, 2.618.

• Wave 3: frequently approaches 1.618 × wave‑1 length, measured from the bottom/top of wave 2.
• Wave 5: common equality with wave 1 (1.0×) or 61.8% of the net distance 0→3; alt: 1.272× of wave 1 from bottom/top of wave 4.
• Wave C (in A‑B‑C): often equals wave A (1.0×) or extends to 1.272–1.618× A, measured from B.

Workflow — From Structure to Trade Plan

1. Identify swing points on HTF (H4/D1). Sketch potential 1‑2‑3‑4‑5 or A‑B‑C.
2. Measure retracements for wave‑2/4 candidates using Fibonacci; mark confluence zones.
3. Project targets for wave‑3/5 or C using extensions.
4. Define invalidation using hard rules (e.g., wave‑2 cannot breach start of wave‑1).
5. Execute on LTF (H1/M15) with price action triggers and predefined risk (≤1%–2%).

Worked Examples — Numbers & Steps

Example 1 — Wave‑3 Projection (bullish)
Wave‑1 length: 1.0900 → 1.1000 (100 pips)
Wave‑2 retraces to 1.0950 (50% of wave‑1)
Project wave‑3 target: 1.618 × 100 pips = 161.8 pips
Add to wave‑2 low: 1.0950 + 0.01618 = 1.11168 (≈ 1.1117)
Stop loss: below 1.0950; partials at 1.272 and 1.618 projections

Example 2 — Wave‑C Equality
Wave A: 1.2800 → 1.3000 (200 pips up)
Wave B retraces to 1.2920 (40% retrace)
Wave C projection (1.0 × A): 200 pips from B = 1.2920 + 0.0200 = 1.3120
Alternative: 1.272 × A → 200 × 1.272 = 254.4 pips → 1.2920 + 0.02544 = 1.31744

Example 3 — Wave‑5 Equality with Wave‑1
Wave‑1: 80 pips; Wave‑2/3 complete; Wave‑4 pullback to 38.2% of wave‑3
Wave‑5 target: add 80 pips to wave‑4 end. Use channel top for confluence.
Manage risk: move to breakeven after price reaches 1.0 × wave‑1 projection

Invalidation & Risk Management

• Place stops at logical invalidation levels defined by hard rules (e.g., below wave‑1 start for long counts).
• Reduce size around high‑impact news; slippage can violate tight stops.
• Use partial exits at extension targets; trail below prior swing lows/highs.

Common Mistakes

• Over‑labeling every swing; keep counts simple and consistent.
• Ignoring alternation; if wave‑2 was sharp and deep, expect a sideways/shallow wave‑4.
• Forcing counts that break hard rules — if violated, relabel immediately.
• Trading wave counts without confluence (Fibonacci + structure + time of day).

FAQ

Q: How do I tell if wave‑3 is underway?

A: Look for strong momentum, shallow pullbacks, and expansion candles; price often respects a steep channel during wave‑3.

Q: Which Fibonacci levels are most reliable?

A: 38.2%, 50%, 61.8% for retracements; 1.272 and 1.618 for extensions. Always seek confluence with structure.

Q: Can Elliott Wave be fully objective?

A: Labeling has subjectivity. Use the hard rules for invalidation and keep a journal to test which guidelines fit your pairs/timeframes.

Next Steps

Practice counting waves on historical charts. Build a template that overlays Fibonacci retracements and extensions automatically. Combine with risk rules and partial‑close logic from previous lessons to create a full trade plan.