What it means
Elliott practitioners measure waves against each other with Fibonacci ratios. Common guidelines: wave 2 retraces 50–61.8% of wave 1; wave 3 is often 1.618 × wave 1; wave 4 retraces about 38.2% of wave 3; wave 5 is often equal to wave 1.
These are guidelines, not rules: real waves often miss them.
Why traders use it
Ratios give a count something to aim at. If wave 3 has already travelled 1.618 × wave 1, the most extended part of the move may be complete.
Chart examples
Wave 2 at 61.8%, wave 3 at 1.618
How to identify it objectively
- 1Measure wave 1 from its start to its end.
- 2Draw a Fibonacci retracement over wave 1 for wave 2.
- 3Project wave 3 from the end of wave 2 by 1.618 × wave 1.
- 4Treat each projection as a zone and wait for price to react there.
Bullish use
- 1Wave 2 reacts in the 50–61.8% zone of wave 1.
- 2Wave 3 target: end of wave 2 + 1.618 × wave 1.
- 3Wave 4 pullback near 38.2% of wave 3.
Bearish use
- 1In a downtrend, the same ratios apply downward.
- 2Wave 5 near equality with wave 1 is watched for exhaustion.
What confirms it
- The ratio zone lines up with structure or liquidity.
- Momentum slows as price reaches the projection.
What invalidates it
- Price runs far past the projection without slowing.
- The underlying count breaks one of the three rules.
How a hypothetical setup is built
Entry
Long when wave 2 reacts inside 50–61.8% of wave 1 with a bullish close.
Stop
Below the start of wave 1.
Target
The 1.618 projection of wave 1 from the wave 2 low.
A hypothetical illustration of how the concept is turned into a plan, not a recommendation. Practise it on a paper account first.
Related concepts
- Elliott Wave TheoryElliott Wave Impulse (1–5)
- FibonacciFibonacci Extensions
- FibonacciFibonacci Confluence Clusters
Historical testing
Not tested on The Tradeskill. In the drawing: wave 1 runs from 100 to 106 (6 points); wave 2 retraces 61.8% to 102.29; wave 3 is projected to 102.29 + 1.618 × 6 ≈ 112.
Limitations: when it fails
- Ratios are often close but rarely exact.
- Choosing which ratio applies after the fact creates false confidence.
- No published evidence shows these ratios have predictive power on their own.
Knowledge check
Pick an answer to see the explanation. Nothing is saved.